Political regulation in the ''great crisis''

Werner

Vath (ed.)

Political Regulation in the

»Great Crisis«

Werner Vath (ed.)

Political Regulation in the »Great Crisis«

edition sigma

Zover Illustration: "Der Tod als Weichensteller" [The Death as a Points nan] by Tobias Weiss [1840-1929]. Sheet No. X of the cycle "Ein noderner Totentanz. Zwanzig Blatter aus dem Bilderbuche des Todes [A vlodern Danse Macabre. Twenty Sheets from the Death's Picture-book], >ezeichnet von Tobias Weiss. Mit Vorwort und Spriichlein von P.W. iCreiten S.J.", B. Kiihlens Kunstverlag, Monchengladbach, 3. Aufl. 1905

The publisher expresses thanks to Dipl.-Soz. Tomas Steffens for considerate co-operation.

CIP - Titelaufnahme der Deutschen Bibliothek Political regulation in the "great crisis" Berlin Ed. Sigma, 1989

/ Werner Vath (ed.).

ISBN 3 - 8 9 4 0 4 - 3 0 1 - 6 NE: VSth, Werner [Hrsg.]

® Copyright 1989 by edition sigma rainer bohn verlag, Berlin. All rights reserved. No part of this book may be reproduced or copied in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, or information and retrieval systems without prior written permission from the publisher. Printing and binding: WZB, Berlin

Printed in Germany

Contents

Werner Vath Political Regulation in the 'Great Crisis' Introduction

Hegemony Crisis in the World Economy

Burkart Lutz Normality, Crisis, or Stagnation

Reflections on the Current State of the Capitalist Economies

Susan Strange Toward a Theory of Transnational Empire Elmar Altvater

Kurt Hubner

The End Of The U.S. American Empire? Monetary and Real Aspects of the United States' Hegemonial Crisis

Robert Guttmann World Money and International Economic Relations

lansjorg Herr )n Post - Keynesian Crisis Theory: The Meaning of 'inancial Instability

91

Crisis of the World Economy Differentiation of the 'eriphery and Development Chances of Newly Industrialized Countries

orge Schvarzer

Challenges and Perspectives of the Economy in Argentina

^eopoldo Marmora

113

Dirk Messner

31d Development Theories New Concepts of Internationalism \ Comparison of Argentina and South Korea

131

iiugenio Rivera Urrutia The Latin American Debate About Development Strategies Based On the Experience of Some Latin American Countries md South Korea

173

rhomas Hurtienne rheories of Development, Differentiation of the Periphery and Development Strategies of the NIC's

191

The Failure of the "Saar- Model" of Crisis Regulation in Steel Industry

Angelo Pichierri Diagnosis and Strategy in the Decline of the European Steel Industry

Udo Gerhardt

Hans-Henning Kramer

The Effects of the European Steel Crisis on German Industry

Susanne Reising

237

261

Walter Bohnert

The World Steel Market: Structural Crisis and Discretionary Mismanagement

265

Patrick A. Messerlin

Recent Developments in the World Steel Market

277

Economic Crisis and the Perspectives of the Welfare State

Michael Kratke Does Social Security Create a New Class? On the Restructuring of Social Inequality by Welfare State Arrangements

285

Klaus Fritz

Michael Wolf

Towards an Institutionalization of Mass Unemployment? Some remarks on the logic of collective action in the current welfare state

Heiner Ganfimann

317

Rolf Weggler

Interests in the Welfare State

321

Bruno Th6ret Interests and Risks of the Analysis of Interests in the Welfare State A comment of H. Ganssmann and R. Weggler

347

Robert E. Goodin Interests in the Welfare State: A Comment

357

The Contributors to this Volume

367

Werner Vath Political Regulation in the 'Great Crisis' Introduction

This volume documents the results of a conference held in November 1988 at the invitation of the research group "Political Regulation in the 'Great Crisis,!l. This interdisciplinary group of researchers belongs to the Department of Political Science of the Free University Berlin. The members of this group have been analyzing the processes of restructuring and transformation whose critical development can be observed worldwide and within society. This will be exemplified by choosing four thematic fields. The common starting point of the four projects is the hypothesis that new economic constellations of problems arise in this situation of radical change, and that accordingly new political models are being tested which also have to include the important old topic of social sciences namely, the relationship between economy and politics. For one and a half years, the research group has been contributing to the problem, as it is formulated, in the topic of the conference. Reflections that have been made so far are to be subject of discussion, whereby the results of research were complemented productively by host speeches. The topic of the conference is based on the fact that since the seventies there has been an inevitable radical change within the socioeconomic development both on the national and international level. The upheaval in the dynamics of development has embraced the entire world system, though not at the same time nor in the same way. Outside the centres of capitalist world economy the rapid process of "backlog industrialization" in some countries and groups of countries has come to a halt, under the influence of the global crisis in economy: at the end of the eighties, the model of an "indebted industrialization", which at the beginning of the seventies was still looked upon as a promising developmental-political option, changed into a "mutilated industrialization". As much as the key-notes of political - development in Third World Countries were overrun by the disasterous indebtedness to foreign countries, the central doctrines of economic politics have changed abruptly in

the capitalist industrialized nations during the last decade. In place of a Keynesian regulating policy that, for instance, has also proven inadequate in dealing with the crisis of early industrialized branches, various varieties of a Neoliberalism arose which promised improvement. With this change of paradigm the Keynesian welfare state, being itself a historical result of power constellations within society after World War II, was undermined and questioned in many ways. But not only historical institutions of "capitalist democracies" have become fragile during the seventies. Under the effect of economic processes, also political institutions and forms of o r ganization of capitalist world economy have become obsolete. The collapse of the system of Bretton Woods exemplifies this development. In this context a change in the way of regulating economic processes can be regarded as a symbolic manifestation: from political to economic regulation. The temporal coincidence of such changes can be regarded as mainly responsible for the fact that the category of "crisis" has become the key metaphor of the seventies and eighties. Too often the trivial analytical understanding, that not every change can be equated with a crisis, has not been mentioned. Taking a detailed look at the processes, one could even get the impression that the image that has been projected so far, describes the real processes in a too one-sided way. Isn't it correct to say, one could ask, that a country like South Korea, with its model of indebted industrialization, has very successfully taken the "big jump" forward? And isn't it also true that a project of a supply-side policy, pursued energetically, such as Ronald Reagan practised it in the USA, lead to the creation of millions of jobs? And shouldn't one also consider that the end of the Keynesian regulation of economy was only the beginning of new and other forms, especially of political regulation? Already these urgent questions provoked by empirical experience, point to the rejection of quick descriptions of condition and the precise use of analytical categories. This is even more valid, taking into account beyond that, that the interferring processes between the economic crisis and the restructuring of the relationship between economy and politics nationally and internationally - have hit social sciences in a rather unprepared way. The theoretical offer of analytical penetration of these processes crassly contrasts with the real dynamics of global restructuring. The r e conditioning of such empirical - historical as well as analytical research assignments are only conceivable within the framework of interdisciplinary cooperation. Individual disciplinary analyses are no longer sufficient to come even close to being suitable for complex dynamics of radical changes. With regard to this recognition, the studies of the research group and the presentation of topics during the conference were conceptualized.

Correlating the scientific approach of the group, Burkart Lutz makes comments which extend over and beyond, in which primary definitions such as "normalization", "crisis", "accumulation", "regulation", etc. are taken up and discussed in context. They also structualize the individual fields of study, starting with the topic of the crisis of the existing global system of hegemony under the leadership of the USA. Elmar Altvater and his study group are responsible for this field of research. Global perspectives will be resumed in the following section which deals with the theme of changes within the international division of labour, with its implications on the status of especially the Newly Industrializing Countries; Thomas Hurtienne and his study group are responsible for this section. Innersocial forms considering terms of restructuring processes will then be discussed with regard to the crisis-prone branch of the steel - industry, where throughout Europe as well as especially in the Federal Republic of Germany, interesting variations in the relationship between economy and politics are mentioned. Werner Vath and his study group are in charge of this field. The relationship of welfare state development and social stability is ultimately a central problem of the fourth section, in which maybe only the most prominent paradoxical phenomenom is pursued which in spite of the to some extent severe cuts in the social security system of industrialized countries, this still was not able to impair their social coherence. This topic is dealt with by Heiner Ganpmann and his study group. Special thanks go to the many people who organized this conference and completed this volume; first we want to thank our foreign guests who came to Berlin to discuss with us and who gave us their manuscripts for use. The editiorship was held by Tomas Steffens. Without the social competence of Eva - Maria Kenngott and Heike Wessels - Schild the pleasant and productive course of the symposium would not have been possible and behind the curtains Kurt Hiibner was the inevitably supportive force. The conference was made possible financially by a support of the Volkswagen - Fund, as well as by the research commission of the Free University; we want to thank them.

Burkart Lutz Normality, Crisis, or Stagnation Reflections on the Current State of the Capitalist Economies*

I. The alternatives "normality or crisis" do not do justice to the variety of interpretations which are offered for the present situation of the Western industrialized nations. I see rather four interpretations, which I would like to consider in more detail. 1. One seldom comes across an explicit defense of the "thesis of normality", and then usually in passing, as in Abelhauser's 1983 Economic History of the Federal Republic [of Germany], for example. For a few years now, however, this thesis has been, in a more implicit sense, quite present in the public consciousness and in the discussions among economists. Its essential argument is that a sort of "natural" growth path exists in industrial free - enterprise economies, which more or less corresponds to the growth of productivity in the economy as a whole, and which has accordingly leveled out over the past decades at an annual growth rate of 2%. Schumpeter had already spoken of this figure in 1940, in the context of a thoroughly optimistic prognosis of the future, "with, however, the disturbingly contemporary hypothesis of a permanent unemployment rate of 10%. The much more rapid growth in the 1950's and 1960's was the manifestation of a recovery effect resulting from economically exogenous, politically and militarily generated interruptions and delays of growth in the 1920's, 1930's, and 1940's. Thus what can be observed, since the early 1970's, is the settling of a very stable long-term trend, which we can reliably expect to continue; society must reconcile itself to the consequences of this, such as the underutilization of the economic potential of the labor force.

*

Revised text of the tape transcript. For details of the position presented here see: Burkart Lutz, Der kurze Traum immerwahrender Prosperitat, Frankfurt/New York, 2nd edition, 1989.

This interpretation seems to me to be hardly plausible and, due to its implicit political repurcussions, most inopportune. Another group of interpretations has its theoretical basis in the idea of crisis. If we exclude from the category of serious arguments the expectation that the current crisis of capitalism will sooner or later lead to its inevitable collapse, there remain two interpretations which view the present situation as a crisis. 2. One of the crisis - oriented interpretations includes all the approaches which assume the existence of long waves in the economic cycle. According to these approaches, we are currently going through the low point of a "long wave". The basic innovations of the last wave have exhausted their growth potential. At the same time, however, new basic technologies are close at hand - the field of microelectronics naturally comes to mind here - whose wide application will create and sustain the next upturn, the next long-lasting economic boom. 3. The other crisis - oriented position is associated with the concept of the "Great Crisis", which is advocated by the "regulationists" According to this interpretation, we are currently experiencing the end of one regime of accumulation* which had been stable for decades but has been exhausting its potential since the 1970's, and the transition to a new regime of accumulation. This transformation is a "Great Crisis" because the institutions, norms and values of the regulatory system are also being questioned. 4. I myself support another interpretation, one which does not need to resort either to the concept of normality or to that of crisis. Like the regulationists, I am convinced that one can identify, within the course of the development of capitalism, phases of growth which are relatively long-lasting and internally quite stable. These phases take a cyclical course, with a period of rapidly increasing growth followed by a period of diminishing growth. One can probably plot this course quite well on the basis of the development of profit rates, not in the sense of a tendential fall, but as a real movement, in which each "prosperity constellation", as I call them, possesses a certain growth and accumulation potential, which is then at some point depleted. Unlike the regulationists, however, I do not believe that the depletion of the growth or accumulation potential of such a development phase must necessarily in and of itself bring forth a new regime of accumulation. On the contrary, I am convinced that each of these phases of accumulation is unique, a singular historical adventure based on very particular, unique opportunities and accomplishments. When these potentials are depleted, capitalist economies and societies enter a phase of (increasingly) stagnant tendencies, in which they are more and mare susceptible to crises and increasingly unable to solve their problems. The question of when this

stagnation period comes to an end (it can last a very long time), and how this occurs, has very little to do with the characteristics of the preceding regime of accumulation. In other words: as far as the conceptual pair destructuring/restructuring is concerned, I accept the term destructuring, but I refuse categorially and conceptually, as well as in terms of concrete historical analysis, to make "restructuring" a logical consequence or a derivative of "destructuring". The significance of this for the present situation is this: the developed capitalist economies stagger along, so to speak, as long as everything is going well. The increasing pressure caused by the various problems does lead to increasingly hectic and dramatic attempts to break out of the growth blockage and to produce a new surge of growth, to create a renewed prosperity constellation. But so far, no new durable prosperity constellation is in sight. II. If one attempts a comparative evaluation of these four interpretations of the current state of affairs moderate growth, with considerable underemployment, as capitalist normality; slowing down of growth and increasing susceptibility to crisis as the unavoidable price for the coming boom in the next long wave; the Great Crisis at the crossroads between two regimes of accumulation, as argued by the regulationists; and the beginning of an historical phase of stagnation then various criteria must be brought to bear. Some of these criteria are, strictly speaking, of a scientific nature. In keeping with them, each interpretation must meet at least three requirements. It must: be to a certain extent internally consistent in its logic; correspond to the actual course of developments and to the circumstances which characteristize them; be based in the prior history of industrial - capitalist economies and societies in such a way that either suitable analogies can be cited, or explicit reasons can be given for any disparities between the course of events this time around and previous instances where the conditions were identical. These requirements call on the one hand for a wide-ranging and complex research program. On the other hand, one must come to terms with the fact that for various reasons, even if such a comprehensive research program is undertaken, no conclusive truth can be found. Statements about fundamental tendencies of social development are never simply a

matter of scientific perception; along with them one always adopts a position relative to the actual historical process. Therefore the question as to which of these interpretive models should be given preference must also be posed on another, existential - political level, and as a question of perceptive and active strategic appropriateness at the same time. If one applies these criteria of a political - practical nature to the above-mentioned interpretive models, it becomes clear very quickly that they can be arranged in order of mounting difficulties and demands. The thesis of normality implies that there is no need for political action. The existing instruments of political regulation are completely sufficient for overcoming the pending problems; it may in fact be time to withdraw one or other of them. For this reason there is no particular need for scientific innovation. New economic theories would more likely contribute to feelings of insecurity. The long-wave theory also implies in effect a merely marginal or subsidiary need for political action. Under certain circumstances, at the lowest point in the long wave, politics can be called upon to accelerate the innovation process already in progress and to help new basic technologies make their breakthrough. If one accepts the version of the longwave theory expounded by Schumpeter or Mandel, the purpose of politics is above all to remove obstacles to innovation and to clear the way for the new basic technologies which can sustain the next boom. The Great Crisis theory of the regulationists attests to a far greater need for political management. There is a general consensus among the various representatives of the regulation theory that a new regime of accumulation can only be called into being by more or less consciously achieved political - institutional innovations. Thus the central task of politics is to initiate, safeguard and direct the process of restructuring, accompanied by a considerable demand for scientific arguments and advice. The heaviest demands on politics (and derivatively also on the sciences) arise in my opinion out of the stagnation model which I support. For in this case it is not clear if and how the two tasks which accrue to politics can be reconciled with one another. On the one hand it is a matter of crisis management, e.g. of a range of measures, policies and strategies, with which one must first ensure that the stagnation does not develop into a cumulatively more critical depression or even into the form of violent eruption which we experienced in the most dreadful way in the 1930's and 1940's. Yet politics must simultaneously ensure that a new regime of prosperity is gradually able to emerge and stabilize.

If one takes these scientific and political - practical criteria as a basis, it becomes, in my opinion, immediately clear why neither the normality premise nor the long-wave theory can be of particular interest. In a theoretical sense, everything points against the assumption implicit in the thesis of normality of a course of industrial free - enterprise growth and capitalist accumulation which is stable in the long term and largely free of conflict and tension. No enduring period can be found in history in which such moderate and steady growth predominated without the simultaneous build-up of conflicts and tensions which sooner or later put an end to this prosperity. Current developments are also incompatible with this interpretation. The locomotive function of the vulgar Keynesian budget deficits (and corresponding trade deficits) of the U.S., for instance, are certainly not reconcilable with the concept of a natural path of development. The criteria of perceptive and active strategic appropriateness also lead to the same result: if one follows this interpretive model, there exists neither a need for political action nor any sort of compulsion to undertake larger and riskier scientific innovations. This way of thinking leads to policy recommendations which if the theory proved to be incorrect could have catastrophic consequences similar to those resulting around 1930 from the blindness with which the attempt was made to overcome the cumulative depression trends by means of deflationary measures. The results of an evaluation of the long-wave theory are, all things considered, much the same. The theoretical key to Schumpeter's version of the long-wave theory, which was subsequently also adopted by Ernest Mandel, rests in the claim that worsening conditions of growth and realization (put" in terms of value theory, a real decline in profit rates) by themselves release forces of technological innovation, which especially in Schumpeter's view take the form of a new generation of pioneering enterprises, which then create, at the low point of the long wave, the conditions necessary for the next long-lasting boom. I have yet to hear a single conclusive argument why this phenomenon, even if it may have happened at some point in the past, should with any probability materialize again in the future. The advocates of the long-wave theory also have considerable difficulties with concrete periodization, for the same reasons which cause so much trouble for the regulationists, since the growth cycles of the various parts of the industrial - capitalist world in the 20th century have occured at irregular intervals, a fact which can by no means be explained solely by exogenous events of a political - military nature.

Above all, the role which is assigned to the process of technological innovation by the long-wave theory cannot possibly be reconciled with the current state of knowledge about socio - historical and socio - scientific technological research. This research emphasizes in particular the social and economic control and selection mechanisms of the process of technological innovation, and thus views the causal relationship between prosperity and technological innovation tendentially exactly the other way around. In this respect, every attempt to define the role of technology in the initial phase of the German or West European post-war economic boom leads to identical results: the especially advantageous conditions for extensive growth or extensive accumulation, which are commonly emphasized for this period, were characterized in particular by negligible innovation pressure. In addition, the product and process engineering which distinguished the "Fordist boom" of the 1950's and 1960's in Europe had already been tried and tested in all significant respects, whereas new technologies such as nuclear energy and electronics, which now are retrospectively referred to as growth impulses, only began to play an appreciable part on the industrial spectrum after the boom had already reached full swing. The appropriateness argument also runs quite emphatically against the long-wave interpretive model, which likewise proclaims no fundamental need for action, but at most the necessity of innovation - promoting policy, and therefore gives no significant incentives to scientific innovation. IV. Thus only the two remaining interpretive models, namely the regulationist thesis of the "Great Crisis" and the thesis which I advocate of a longlasting phase of stagnation, can in my opinion lay serious claim to validity. The main difference between these interpretive models seems to me to be the fact that the regulationists place great confidence in the Great Crisis, which is already supposed to be bringing forth a new, stable regime of accumulation on its own, whereas I, doubting this, have significantly more pessimistic expectations for the future. I would like to mention three arguments for this position: 1. Those who spoke of a "crisis" in 1975 or 1980 could still assume in good faith the legitimacy of the expectation associated with this concept of a relatively brief process. But in the meantime* this crisis has been going on for 15 years and we have by no means reached the end of it; there is no light at the end of the tunnel, but we have not fallen into the deep hole which many had feared in 1975.

1K

We must therefore ask ourselves what a crisis actually is. Can we accurately apply the concept of crisis to the present situation in its e n tirety, when it repeatedly produces definite, albeit moderate, surges of growth? In 1966/67 to recall the first major post-war recession - an unemployment level of barely 5%, over a period of a few months, was enough to completely reshape the West German political landscape: the extreme right-wing NPD entered the parliament for the first time; the FDP, in order to assure its survival, had to withdraw from its seemingly eternal coalition with the CDU; and the SPD came to power for the first time since the war in the Great Coalition. No one could have imagined at that time that we could ever live for years with unemployment rates of 8 - 1 0 % without dramatic conflicts or crises of legitimacy. 2. Another argument for the dubiousness of both the concept of crisis and this subjective sense of crisis should be mentioned: I still have yet to see a stable model for the restructuring of European or international capitalism. None of the policies proposed today or in the past, by the right or by the left, has had enough impact to have a lasting influence on the actual economic processes. This applies to monetarism as well as to supply-side economics, to deregulation and to flexibilization, and even to neo - Keynesian policies. Quite the contrary new sets of problems are constantly arising, new contradictions are coming to a head, and new conflicts are emerging which are tendentially larger and potentially even more severe than those which have been solved. How can one then, in view of these circumstances, maintain that restructuring has already begun, that a new regime of accumulation is evolving before our eyes? 3. This leads me to one final point: Do any analogies to the present situation exist in the history of capitalism? If we disregard for now the capitalism of the U.S., since it has a different temporal developmental logic than European capitalism (which might have to do with its parasitic - hegemonic status relative to European capitalism), then we see that the penultimate phase of prosperity - and this means the last stable regime of accumulation which is more or less comparable to the phase of prosperity after World War II - took place before World War I. If that is so, then our situation since the middle of the 1970's must be considered to be analogous to the period which began together with World War I and only came to an end after World War II. This period was characterized on the one hand by a tendential economic stagnation, on the other hand by increasingly dramatic political turmoil - as if the economic and political powers of the European industrialized countries had been trying, with increasing brutality, to find a way out of the blockage of accumulation and economic growth. The great world economic crisis, the First World War, Fascism, and the Second World War must then be understood as parts of a gigantic process of trial

and error, by which European capitalism attempted to break out of its cage, like an ever more furious wild animal. Only after World War II did fundamental political reforms open the gate and clear the way for a prosperity constellation which is referred to by the regulationists, using a very misleading term, as a Fordist regime of accumulation; it can much better be called a welfare - state regime, since the accelerated accumulation of capital and the high growth rates of the national product were clearly only made possible by the welfare - state effects (obstruction of the wage law, stabilization of aggregate demand, etc.). The new regime of accumulation, which in the 1950's liberated us from a seemingly - even in 1950/51! hopeless growth blockage, had however, in practically all its constituent elements, been examined, dis^ cussed, and developed in scientific and political discussions dating back to before World War I. Elements of this model had, on a large scale, already been tested in the Weimar Republic, which was in effect a huge laboratory of progress; its tragedy lay, however, in the fact that it was not able to control the extraordinary demographic dynamism of the German Reich. Every attempt to set in motion a self-supporting domestic growth dynamic through higher wages was thus thwarted by a precipitous increase of the supply of labor, How can one, in the light of this evidence, speak today of an a N legedly emerging restructuring process, when this would presuppose that the concepts, contours and structural patterns of such a restructuring could easily be discerned? If this restructuring had really begun, then a gathering such as ours here today would be discussing at most technical details, and not the basic questions of crisis or restructuring, V. Now the idea of a more or less automatic movement of the dialectics of destructuring and restructuring is admittedly very appealing, and the idea has spread as a result explicitly or implicitly - far beyond the circle of regulationists. This can be explained less by its cognitive plausibility than by its political and epistemological implications. If one adheres to the concept of a regular succession of destructuring and restructuring, the aim of the politically committed scientist will be to look ahead and, amid the seemingly erratic diversity of observable phenomena, to determine the contours of the future through bold insight (as Kern and Schumann have attempted, for instance, with their idea of "new production concepts"). The scientist then finds himself in a quite comfortable position. The irksome questions about alternative tendencies and

about what else is occuring in society, the search for possibly contradictory development impulses, the uncovering of problems which have been at best partially solved and otherwise merely suppressed and deferred the scientist can do without all this, since it only results in unnecessary work and confusion of the political decision - makers. What is called^ for is rather a bold blueprint for the future, a convincing policy conception directed toward the elimination of unemployment, the rehabilitation of the welfare state, and the restoration of stable, qualitative, environmentally acceptable growth. If my interpretive model is correct, we must obviously take a c o m pletely different approach. In this case, we must ask ourselves above all the fundamental question of how industrial - capitalist economies and societies can survive at all e.g. how they will be able to guarantee their material and social reproduction in the future, when the civilizatory achievements inherited from earlier generations have been used up, and when, as a result of the total capitalization of society, the law of the rational maximalization of utility has become the highest behavioral premise. We can then no longer assume our historical inheritance from previous social formations to be obvious and self-evident. We can thus by no means assume the availability of intelligent and qualified workers, for instance, simply because the corresponding training has been provided. On the contrary, the decision to become a worker is only rational and utility - maximalizing under very specific socio-economic conditions. Such conditions existed historically in most industrialized countries. Yet none of us is in a position to specify how the same effects can be produced under completely different historical conditions. We have likewise no answer whatsoever to the question of how a society can guarantee its biological reproduction when reproductive b e havior is dominated by considerations of economic utility - since under current conditions the marginal costs of fertility are rising rapidly with the decreasing number of children, which must inevitably, from an economic point of view, prompt a growing share of the population to forego children altogether. There is every indication that the time to come will not be dominated by more or less independent restructuring tendencies, but rather by an increasing destabilization of the basic functions and basic institutions of our society. And we scientists will be judged primarily by the extent to which we are able to provide at least preliminary answers to the question of what is actually taking place, and what is to be done about it.

Allow me now to conclude my remarks. Some of the phraseology of the regulationist suggests the idea that a universal logic can be determined behind the historically consecutive regimes of accumulation, an idea which fascinates me immensely; this would be the logic of an increasing interpenetration of the political and economic spheres, as if capitalism were in need of ever more government control and discipline, or - to argue optimistically for once - as if socialism were already surreptitiously on its way. If this logic is correct, then in the future no new regime of accumulation will be able to prevail in such a natural manner as was ostensibly the case after World War II. There is rather every indication that a new prosperity in our old European industrialized countries can now only be brought about by a comprehensive, conscious and planned political effort. This is, however, certainly not possible without scientific substantiation, guidance, and support. It will nevertheless be extremely difficult to meet the demands associated with this, because each regime of accumulation seems to bring forth its own particular paradigm. Yet we scientists can not, without raising challenges to our productivity and to our membership in the scientific community, simply break with the dominant paradigm, one which after all is made up of an entire cluster of mutually compatible theories. The theory of growth economy, modernization theory, theories of the Industrial Society and of Late Capitalism are all parts of the paradigm which corresponded to the prosperity constellation which lies behind us. Thus if scientists seriously want to begin laying the foundation for a new, stable system of regulation, it is imperative that they liberate themselves from the currently accepted paradigm. Everyone who has once attempted this knows how full of risks it is. It is not only our scientific truths which are lost here. We must also question the methods on which we have depended, and the mastery of which has been one of the bases of our professional competence. For instance, the current primitive faith of economists in the authority of statistics will fall apart, since statistics are also the product of a paradigm associated with a specific regime of accumulation. Another victim will be the forms of the division of labor, both within our profession and in interdisciplinary work, in which we have all become established and which we attempt to defend, to the extent that the work and livelihood of critical scientists are not becoming easier. Everything thus seems to advise staying with the familiar paradigm, postponing the paradigmatic revolution as long as possible, holding back and hoping that it just might turn out to be unnecessary. This explains quite well why so many critical scientists although sometimes perhaps

not without uneasiness continue to rely on interpretations of the present situation which are based somewhere between the long-wave theory and the regulationist theory of the "Great Crisis", and which are as such just barely compatible with our conventional, familiar scientific establishment. Some of you will undoubtedly be saying that it is easy to talk like this at my age, just before my retirement from professional life. Yet who else than someone in my position should be the one to say, loud and clear, what is historically demanded of critical and politically active scientists such as ourselves? I ask you therefore to consider seriously what I have said to you today, and not to disregard it too quickly, even if you believe that you have sufficiently good counter - arguments. (translated by John Conyers)

Susan Strange Toward a Theory of Transnational Empire*

The American Empire is one of the most successful inventions in history, and all the more remarkable because no one knows its there. Gore Vidal In any discussion among academics about the theory, or theories, underpinning their field of study, it is important that each participant should make explicit his or her assumptions about the nature of theory; about how these assumptions are justified. He or she should also give some general indication of his or her general opinions about past theorizing and about desirable directions for future theorizing. Without such preliminary clarification, discussion can easily become confused and incomprehensible to the outsider. I shall start therefore by making my own position on each of these four points as explicit as I can. There is a great deal of confusion about the nature of theory concerning the working of the international system, political and economic. This has resulted in a lot of "theoretical" work that is not really theory at all, in the sense in which that word should be used and is defined in dictionaries (for example, "a supposition explaining something, especially one based on principles independent of the phenomenon to be explained" - Concise Oxford Dictionary). Because of this, we cannot proceed to discuss future directions for theoretical work nor can we assess recent contributions to it, whether real or imagined, until we have made some judgment about what is real theory and what is phoney theory. *

Reprinted by permission of the publisher from Global Changes and Theoretical Challenges, edited by Ernst-Otto Czempiel and James N. Rosenau (Lexington, Mass.: Lexington Books, D.C. Heath and Company, copyright 1989 Lexington Books).

I make four negative assumptions about what is not theory and three positive assumptions about what is theory. Both are necessary to explain my general pessimism about the current state of theory in international studies, and my own rather tentative explanatory supposition with regard to the current state of the international political economy (which will constitute the second part of this chapter). Negative Assumptions Concerning Theory in Social Science First, a great deal of social theory is really no more than description, often using new terms and words to describe known phenomena, or to narrate old stories without attempting theoretical explanations. Putting one event after another without explaining the causal connection, if any, cannot count as theory. Sometimes, though, there are indeed implicit theories underlying the narrative that are so taken for granted that they are not even mentioned. Second, some so-called theory in international studies merely rearranges and describes known facts or well-chronicled events in new taxonomies. This is not to say that a fresh taxonomy may not be necessaiy to the elaboration of a new theory. But the taxonomy by itself does not constitute an explanation and therefore does not qualify per se as a theory. The same is true of using new terms or words to describe known phenomena. Third, simplifying devices or concepts borrowed from other social sciences or fields of knowledge often have their pedagogic uses in teaching; they can help get across to students or readers a certain aspect of individual social behavior. Examples are the story of the prisoners' dilemma, or a demand curve, or the graphic presentation of the concept of marginal utility. But none of these by themselves explains the paradoxes or puzzles of the international system. Their current appeal to some teachers, I suspect, is that they offer a politically and morally neutral explanation (indeed, an exculpation) for the recent failures and inadequacies of the international organizations dominated by the United States in which postwar America put so much faith. Their appeal to students lies in their simplicity; it confirms what their common sense already tells them - that individuals are apt to act selfishly. But these are simplifying devices, not theories of social behavior. They do not help to explain the actions of corporations, of political parties, or of states in a global political economy. They do not even constitute evidence that would be relevant to a theory - in the way in which a map of the world might be relevant evidence for, say, a theory of continental drift and the existence of Old Gondwanaland. Moreover, those in the other disciplines

who have developed such pedagogic devices are usually under no illusion as to their usefulness to policymakers or the possibilities of their practical application to real-life situations. Fourth, the development of quantitative techniques applied to international studies has not advanced theory. The choice of what is to be counted is too arbitrary and the determination of what is causal and what is coincidental is too subjective to provide a basis for explanation. For the most part such methods have been used only to substantiate platitudes and to reinforce conventional wisdom concerning historical patterns of state behavior in relation to other states. Positive Assumptions Concerning Theory in Social Science First, theory must seek to explain some aspect of the international system that is not easily explained by common sense. It must serve to explain a puzzle or a paradox where there is some aspect of the behavior of individuals, groups, or social institutions for which a simple explanation is not apparent. It is not necessary to look for a theory to explain why people try and leave a burning building. It is necessary to find a theory to explain why they patronize shops on one side of the street more than another. International relations started with the puzzling question why did nation - states continue to go to war when it was already clear that the economic gains made in war would never exceed the economic costs of doing so (Miller 1986; Aron 1958, 1978). Theories resulted. International political economy today addresses another puzzling question: Why do states fail to act to regulate and stabilize an international financial system which is known to be vitally necessary to the "real economy" but which all the experts in and out of government now agree is in- dangerous need of more regulation for its own safety? Theories result. By contrast, the common use of the term "information revolution" does not usually reflect good theory. Although it notes rapid technological change, it does not postulate a clear causal connection, supported by logic or evidence, between that technological change and social change - change in political or economic relationships so great as to result in a redistribution of power and/or wealth. It does not,, therefore, advance our understanding or add anything to our capacity to make causal connections and to see the consequential effects of certain phenomena. Second, the theory need not necessarily aspire to predict or to prescribe. This is where social science differs from natural science. Natural science can aspire to predict though it does not always nor necessarily do so. Much science, from astronomy to microbiology, enlarges understanding of what happens without being able to offer conclusive expla-

nations of why it happens. Social science can never confidently predict because the irrational factors involved in human relations are too numerous, and the permutations and combinations of them are probably countless. The one social science that has most notably aspired to predict is economics. But its record of success is so abysmal that it should make all those that seek to emulate the economists and to borrow from them try something else. (I think I can explain why their record of success in prediction is so bad but that it is not necessary to my argument.) They are particularly bad at prediction when it comes to the world economy because many of the basic theories regarding international trade and exchange rates are based on assumptions that no longer hold good in the present state of the integrated world market economy. As to prescription, that is a matter of choice. Whether the theorist chooses to proceed from explanatory theory to policy prescription is up to him or her. He or she need not necessarily apply theory to policymaking, because policy-making necessarily involves value judgments and risk assessments that are exogenous to theory and that are better made by practical policymakers than by irresponsible academic theorists. And third, theory should be scientific only in the sense that the theorist respects the scientific virtues of rationality and impartiality and aspires to the systematic formulation of explanatory propositions . The title of "social science" is only justifiably used to remind us that, although our subject lies closer to our emotions than the origin of rocks or the compositions of molecules, and although it has to do with subjectively i m portant questions concerning power and wealth, we must nevertheless still try to preserve a "scientific" attitude in our studies. Indeed, many of the problems regarding theory and social science stem ultimately from the inferiority complex of social scientists towards natural scientists and, more specifically for us, the inferiority complex of political economists towards the apparent rigor of economic "science". A Basic Proposition This is that structural power is more important to an understanding of the international system than relational power; and consequently, that because the United States has more actual and potential structural power than any other political authority in the international system, its power in the system is undiminished. This runs against hegemonic stability theory and the many theoretical (and often conflicting) conclusions about the functioning of the inter-, national political economy and of international economic organizations that derive from it. I have explained elsewhere why I think these are wrong

and also why they have been so popular in recent years (Strange 1987; 1988). The important point here is as I shall argue more extensively later - that the failure to understand and appreciate the extent of U.S. structural power has led too many writers and teachers to compose premature epitaphs on the American Century and American hegemony (cf. Russett, 1985). This conventional - but in my view quite unwarranted - conclusion has foreclosed any debate on how an American empire (which is very different from the empires of the past because it is based on structural power in the world economy and world society) might be improved, maintained, and prolonged. My concluding proposal for further thought and research is that we should reopen such a debate, more particularly because the alternatives to prolonging American hegemony are either demonstrably impracticable, or unattractive, or both. But first I have to explain why I think the assumption of hegemonic decline is wrong and why we have to look for a new point of departure for theory concerning the international system and the management of the world economy. In short, I am like the man in the story the English like to tell about yokels from parts of the country other than their own. "Can you tell me the way to get to Norwich (or Dorchester, Wigan, Maidstone or wherever)?" asks the bewildered stranger, lost in a maze of country lanes. "Ah well," replies the local, "if I were you, I wouldn't start from here!" My starting point in this discussion is that although there is disorder in the world economy and some disintegration of "regimes" so-called, the reason for this is not to be found in the decline of U.S. power. Rather, the explanation lies in the misuse of American hegemonic power in a unilateralist manner and in pursuit of national interests far too narrowly and shortsightedly conceived. Asymmetric structural power has allowed the United States to break the rules with impunity and to pass the consequent risks and pains of adjustment on to others. This has damaged the stability and prosperity of the whole world economy and has not been in the long-term best interests of the United States itself. But to persuade the reader to get to that alternative starting point, or even to consider it as a possibility, I must first elaborate a little the outline of a structural analysis that leads me to it. I propose to show that, in the four structures basic to an integrated world economy in an international society with diffuse p o litical authorities, the underlying assumptions of much contemporary t h e o rizing are false. False points of departure have therefore led to false theory.

Structural Power The concept of relational power is clear and consists in the ability of A to get B by coercion or persuasion to do what B would not otherwise do. The concept of structural power is less clear and requires some definition. It consists in the ability of A to determine the way in which certain basic social needs are provided. One is a lever; the other is a framework. The target of relational power, B, if it should decide not to do what is required of it by A, has to suffer the consequences determined by the other. For the target or object of structural power, the price of resistance is determined more by the system than by any other political authority. Structural power comes closest to the outside (that is, broadest) definition of "regimes" in the debate that proceeded the Krasner collection of essays on the subject (Krasner 1983). In short, it embraces customs, usages, and modes of operation rather than the more narrow definition that stays closer to state-state agreements and state - centered institutions. There are, in my view, four basic structures of the international political economy and each is interrelated with, and inseparable from, the other three. Although they can be described separately, it is hardly practical to disassociate any one from the other three, or to treat it in isolation from them. Power in one will tend to reinforce (though it does not always exactly coincide with) power in the others. The four societal needs for a modern world economy are security, knowledge, production, and credit. Who or what provides for these needs in a society enjoys structural power through the capacity to determine the terms on which those needs are satisfied and to whom they are made available. Production is the basis of life and therefore the fundamental essential. But production (or wealth) cannot be enjoyed, or even produced, without order; and order requires the provision of security. Credit supplied by the financial structure is a necessary condition for all but the most basic production structures. In the highly developed, highly capitalized production structure of any industrialized economy, a decisive role is played by the provision of credit through the financial structure. But the choice of social goals and the means of reaching them is determined by the knowledge structure. The power exercised over the nature of the knowledge to be acquired, and over the means used for its storage and communication, is a necessary complement to power exercised through the other three structures. Only by considering all four can the study of economic power and political power be treated together; and only by considering all four can power exercised by the primarily economic entities be seen in the context of power exercised by the primarily political authorities. Only by structural analysis is it possible to develop theoretical propositions r e -

garding the impact of political authority (for example, states) on economic transactions in markets, and conversely of the impact of transactions in markets upon states (Strange 1988). The concept of a production structure is the most familiar because it is central to a marxist analysis of the capitalist system. Marx pointed out long ago that power in society is exercised through the relations of p r o duction. That is to say, whoever determines what shall be produced by what means and modes, and who shall work at producing on what terms, exercises structural power irrespective of the political system. It follows that a production structure can, conceptually and actually, be market based; or it can be market - managed by monopolies, oligopolies, or v e r tically integrated enterprises that "internalize" a market; or it can be commandbased, in which case some political authority "plans" the market and determines what shall be produced by what means and modes, and who shall work at producing what and on what terms. If we analyze the world system as a production structure, we find the following features. First, that part of the world economy responding directly to political command (which might be described as socialist if that word were not so badly abused) is the smaller part and is shrinking. Even in the avowedly socialist countries more and more production of goods and services is designed for and sold on a world market, over which the political a u thorities of the socialist states have little influence, even if they wished to exert it. (Gold and shipping are two exceptions.) Second, that part of the world economy that responds entirely to market signals, and obeys the laws of supply and demand with the absolute minimum of interference by governments and other authorities, is also shrinking. Trade in primary products food and unprocessed raw materials - is more often conducted in markets over which individual buyers and sellers have little or no capacity to determine price than is trade in manufactures and services where more prices are "administered" in Galbraith's words. But trade in primary products constitutes a shrinking proportion of total world trade. Third, that part of the production structure geared to purely national markets over which national authorities may if they wish exercise a choice of policies to influence the preferred combination of factors of production, the price and terms for the employment of labor, land, and capital, and the rules incumbent on employers, banks, landlords, buyers, sellers, brokers, and other intermediaries, is also shrinking. The technological imperative to sell on a world market reduces the area common to all states over which national governments are able to exercise exclusive regulatory power.

Fourth, the largest part of the global production structure in raw materials, in manufacturing, and in service industries is dominated by large transnational corporations (TNCs). The TNCs account for an ever growing proportion of world trade. This is intrafirm trade that is not subject either to the market and not necessarily affected by the trade barriers imposed by states. In this largest and fastest - growing section of the world production structure, TNCs based in the United States, plus TNCs based elsewhere but having a large part of their profit - making operations in the United States, play a dominant role. Any TNC, whatever its nationality, that hopes to keep a substantial share of the world market now finds it indispensable to operate in the territorial United States. The political authority, therefore, that most TNC executives are likely to heed( and most anxious to avoid offending is that based in Washington. Some Japanese executives will still respond more readily and out of habit to Japanese political authority, but if they wish to operate on a global market, even they will find it increasingly necessary in the future to pay close attention to what goes on in Washington. The combined effect of the above dynamic features of the contemporary production structure is to increase the asymmetric influence of some governments compared with others over what is produced, where, by whom, and on what terms. All the decisions about the regulation of market operators and intermediaries that used predominantly to be the prerogative of each national government are now shared unevenly between a few governments of the largest and richest countries of which the government of the United States is by far the most important. It follows that the structural power of the United States is not to be measured by the value of the goods and services produced within the territorial United States (that is, the U.S. GNP). Nor yet is it to be measured by the value of such goods sold on (exported to) the world market. If it can be estimated at all, it is the total value of goods and services produced by large companies responsive to policy decisions taken by the U.S. government. A good example of this is the power of the United States to restrict trade between the world market economy and the Soviet bloc. This is not exercised primarily, as recent experience shows, by bludgeoning the governments of NATO allies to conform to the COCOM list. It is exercised by the implicit (and occasionally explicit) threat of the U.S. government to make life hard for any non-U.S. corporation that flouts its will. Another example is the influence of U.S. policy on the corporate strategies of major oil companies, including those like Shell or BP that are not themselves U.S.-based. The dominance of the U.S. government over the financial structure of the world economy - what Peter Drucker has called the "flywheel" of the real economy and the enormous leverage that is exercised through this

particular form of structural power is even more evident (Drucker 1986). How much credit is provided by governments, by international organizations, and by banks, and to whom, and on what terms is more important than what they produce or sell on the world markets. Whether the U.S. decides to let loose the hounds of inflation or to bang the door of de flation is something over which the rest of the world has little control. Yet it is the world economy that is the anvil and the United States the hammer, in Lenin's apposite metaphor. The story of deregulation of banking and financial services is too long and complex to go into here but there is absolutely no disagreement today among the experts who have researched its progress over the last decade that the initial steps were ,every time first taken in Washington. And because of the worldwide integration of financial and money markets, because of the competition of banks in an integrated global financial system, and because of the c o m petition of governments as hosts for financial and capital markets, it has proved impossible for any country involved in this financial structure to resist the magnetic pull of U.S. policy. Whether its good effects (opening new opportunities for borrowing and hedging for instance) are worth the bad effects and the risks involved is beside the point. The point is that policy-making power has rested - as it has done throughout the postwar period with the United States. The perception that the United States has lost power to the banks or to the foreign exchange markets is only correct in the short term. As the experience of the Roosevelt administration in the 1930s showed clearly, bankers like everyone else (even insider traders) are subject to the law, and the law can be changed to bring them back under the control of the states. The knowledge structure is the least familiar concept to scholars in international relations, even though all are familiar with the adage that ^knowledge is power". In this short chapter there is hardly space to explain the concept in full. But just as the power to determine what shall be produced by whom and on what terms constitutes structural power in production, so the power to determine what knowledge shall be sought; how it shall be accumulated and applied; how and where knowledge once ^accumulated shall be stored; and to whom it shall be communicated and ,on what terms, constitutes another kind of structural power in world society and in the world economy (Strange 1988). Some of the illustrations of American dominance in the global knowledge structure that may be cited are the continued dominance of U.S. corporations in most of the high - technology industries; the dominance of .U.S. banks in transborder data flows; the dominance of U.S. media o r ganizations in news and entertainment; the outward spread from the United States to the rest of the world of management, marketing, and advertising techniques; the dominance of U.S. banks and consultancy

enterprises in debt management; the dominant position of U.S. government and U.S. corporations in satellite communications; and the ability of U.S. universities to attract and use scientists and academics from the rest of the world, drawing them not simply by better salaries but by better opportunities for research and exchange of information and ideas with their peers. Above all, perhaps, it is evident in the use of the American version of the English language as the world's lingua franca even for the French, the Russians, and the Chinese. Finally, there is the structural power exercised in matters of security. It is the United States, in response only to the Soviet Union, that has determined the world's dependence for its security on the balance of nuclear deterrence conveyed by an armory of intercontinental, intermediate, and short-range missiles. This is the only global structure of them all where the United States shares power with the Soviet Union. In all the other three, Soviet structural power extends only as far as the reach of the Red Army; U.S. structural power reaches deeply into the developing continents of Africa and South America, into Asia and the Middle East, and relentlessly even into Eastern Europe and China. This structural power over who is assured security and by what means, at what costs, and at what risk is, however, reinforced by the United States* structural power over the world's productive system, over its financial structure and the credit institutions and markets that function in it, and over the producers and communicators of knowledge in the knowledge structure. The conclusion to be drawn from this structural analysis is that the decline of U.S. hegemony is a myth - powerful, no doubt, but still a myth. In every important respect the United States still has the predominant power to shape frameworks and thus to influence outcomes. This implies that it can draw the limits within which others can choose from a restricted list of options, the restrictions being in large part a result of U.S. decisions. As Wallerstein emphasizes, hegemony does not mean total power to command. It means predominance; and predominance conveys the ability to change the range within which it is reasonably possible for others to choose among various courses of actionAll that happened in the late 1970s in the aftermath of Vietnam, of Watergate, of the fall of the Shah and of the partly self-inflictedhumiliation over the Tehran hostages, is that American self-confidence^ faltered under the leadership of a weak, tired, and shallow - minded president. The academics of the 1980s have been living in the past and figuring out theories of hegemonic stability to account for the public mood of the late 1970s. This is not, however, the first time that social scientists have behaved like generals who, overtaken by events, make elaborate preparations to fight the last war.

The other thing that has happened, and not only to the United States, is that structural change has at last severed the connection between the power of the state and its control over territory. The territorial frontiers of the state are now important only inasmuch as there is a consensus among existing, mutually recognized political authorities that regulatory power over the consumers living within its frontiers rests with the authorities of the territorial state. The power over the producers, and over the security, credit, and ideas available to both producers and consumers may be exercised by other authorities beyond the territory. This structural change has perforated the borders that define national societies, national defensive systems, national monetary and economic systems, and to a large extent national cultures. But the perforations operate unevenly, and c e r tainly asymmetrically, so that the borders of the United States are far less perforated by structural change than those of others, and the United States has had more influence than others over the nature and direction of the structural change. What is emerging therefore is a nonterritorial empire with its imperial capital in Washington, D.C. Where imperial capitals used once to draw courtiers from outlying provinces, Washington draws lobbyists from outlying enterprises, outlying minorities, and globally organized pressure groups. Authority in this nonterritorial empire is exercised directly on people not on land. It is exercised on bankers and corporate executives, on savers and investors, on journalists and teachers. It is also of course exercised on the heads of allied and associated governments, as successive summit conferences have clearly shown. Moreover, all the major policy trends of the 1980s that have commonly afflicted most of the developed and semideveloped countries and that have appeared to be of a national and internal character deregulation, deflation, privatization, and so on have been set off in the United States and have been followed by others who felt unable to resist. In all these policy areas, frontiers have been no defense against pressures emanating from the United States. This is the major difference between the American and .Soviet empires. The Soviet empire is more old-fashioned. It remains much more firmly territorial, much more dependent, like the empires of old, on a clearly defended perimeter frontier all around it, marking off those inside the empire from those outside./ The American nonterritorial empire is different. To start with, the perimeter fence around those American client states corresponding to the Soviet client states of Eastern Europe is not a rigid containing wall, preventing movement outside and enforcing conformity inside. Canada and Mexico both live in the shadow of the United States but their degree of freedom to choose is very substantially greater than that of Poland or even Hungary. Moreover, beyond the U.S. "backyard" of

^Jorth and Central America and the Pacific and Caribbean islands, there is mother American empire that really is nonterritorial and in some respects s more like the Roman empire than the French or British empires. As in Rome, citizenship is not limited to a master race and the empire contains* a mix of citizens with full legal and political rights, semicitizens and n o n - 7 citizens like Rome's slave population. Many of the semicitizens walk the* streets of Rio or of Bonn, of London or Madrid, shoulder to shoulder! with the noncitizens; no one can necessarily tell them apart by color or1 race or even dress. The semicitizens of the empire are many and * widespread. They live for the most part in the great cities of the non - ; communist world. They include many people employed by the large transnational corporations operating in the transnational production structure and serving, as they are all very well aware, a global market. They ' include the people employed in transnational banks. They often include' members of "national" armed forces, those that are trained, armed by, and; dependent on the armed forces of the United States. They include many' academics in medicine, natural sciences, and social studies like manage - ' ment and economics who look to U.S. professional associations and to U.S. universities as the peer group in whose eyes they wish to shine and to excel. They include people in the press and media for whom U.S.* technology and U.S. examples have shown the way, changing established7 organizations and institutions. ^ Because the Americans once fought a war of independence to be free of British domination, they have ever since counted themselves as among the world's anti - imperialists. They think of empire building as a peculiarly European foible in which they themselves do not indulge. They think of empires as if they were all like European empires. For this reason they find it particularly hard to abandon their embedded image of themselves as inveterate liberals and anti - imperialists, or to recognize U.S. foreign and economic policies as in any sense the policies of an imperial power H (Strange 1986; Dale 1986; Nunnenkamp 1986). Americans are not, of course, the only ones to nurture a delusion about themselves or to suffer the myopic inability, as Robert Burns put it, "to see ourselves as others see us!" But in their particular case the myopia has had the side effect that it has shut scholarly inquiry off from a whole range of questions that could be of great significance for the future of the; world. It has made most U.S. scholars temperamentally rather indifferent to theoretical analysis of all aspects of the phenomenon of empire. Recent exceptions are Doyle (1986), Olson (1982) and Kennedy (1987). But even these studies have addressed the question of what it is that makes some* empires decline, rather than what it is that makes other empires last. Interest in imperialism as a phenomenon of world society already hasa bias toward the negative aspects rather than the positive aspects of the

subject, for which Hobson and Lenin and much subsequent marxist writing are chiefly responsible. This has emphasized the negative causes reasons such as the falling rate of profit on capital - for the acquisition of empires, and the negative consequences of imperialism for the inhabitants of empires and for international relations generally. The major ; divergence of interpretation was that between Lenin and Kautsky as to whether competition between capitalist states for imperial possessions was apt to increase the chances of war between them or, alternatively, whether their shared interest in the exploitation of human and natural resources of less economically developed parts of the world would lead them to form an implicit cooperative structure that would make it more difficult for dependent peoples to throw off their inferior, disadvantaged role in the world economy. The presumption of most writers on imperialism has been that imperialism was undesirable, so that the main policy - related issue was how to get rid of it. , Standing back a little from the literature on imperialism, it is at once ; apparent that it has been very narrowly based upon European experience. [Certain characteristics of imperial power have been taken for granted that iin fact need not apply universally, but that were characteristic of the European empires of the sixteenth to twentieth centuries. For example, it is often assumed that empires are overseas empires, and that they are not •usually contiguous to the territory of the metropolitan power - even though it is clear that in the Russian case (under the tsars and under the soviets), and in the case of China, this is not so. Prevailing theories also assume that the imperial power is more advanced in its economic development and in its command of technology than the areas it dominates. Again, Soviet domination of Eastern Europe, and especially of East Germany, Czechoslovakia, and Hungary contests this assumption. Soviet technology is more advanced in defense - related i n dustry, but not in other sectors. This suggests that some U.S. writers may be wrong who assume that the United States must lead the world in every .sector of economic life or else resign itself to total loss of hegemonial :power. ^ Prevailing theory also assumes that the advanced country surrounds its | territorial empire with protective barriers in order to give itself a market Sheltered from foreign competition. As a consequence, the prices of many J'goods sold to the local inhabitants are higher than they would otherwise •be. Furthermore, it extracts minerals and other raw materials at low ;prices, thus doubly exploiting the inhabitants. By focusing exclusively on 'this exploitative character of territorial empires, a theory of imperialism has naturally been inclined to ask only a limited range of questions. It seems to me that what is needed now is some fundamental reconsideration of the nature of empires; about the benefits they may confer,

the risks they may modify, and the opportunities they may open up as well as the costs they may impose on which so much attention in past theories of imperialism has concentrated. Secondly, we need some serious reexamination of the policy options open to imperial powers. (You may call them "hegemonic powers" or "states exercising leadership in an alliance" if labels bother you.) The justification for pushing theoretical work in these directions is' twofold. One is that imperial decline is a common source of instability and conflict in international systems. The other is that if the alternative to a power vacuum in the wake of an American empire is either a Soviet, a Japanese, or even an Chinese or (less likely) a collective European empire - or else a collective, multipolar system, none of these would be as acceptable to the constituents as is the present American empire. * On the first point, it is a fact that the major destabilizing developments in the international system of the last hundred years have all been* associated with the decline and breakup of old territorial empires. The fall of the tsarist Russian empire, of the Turkish Ottoman empire, of the Manchu Chinese empire, of the British Raj, of the French empire and even of the Belgian and Dutch empires have all been followed by quite serious conflict between the successor states or would-be states. As Denis Brogan once wrote in a book titled The Price of Revolution (1948), revolutionaries always overestimate the fruits of revolution and grossly underestimate the costs. There is therefore much to be said in politics and in political economy for gradualist solutions, and for gentle and gradual rather than violent change. Systematic study devoted to the development of a theory of nonterritorial empires would seem to serve just this purpose. On the second point, that an American nonterritorial empire is much" to be preferred to either a Soviet or a Japanese one, it seems obvious that most Europeans, Asians, and Latin Americans associate an unacceptable restriction of both political freedom and of economic freedom and enterprise with what they know of the present Soviet empire and are not1 keen to see it extended. Similarly, the corresponding suspicion of and resistance to a second Japanese empire in East Asia is not just a matter of bitter memories from the early 1940s. The big difference between the Japanese and the Americans is that it is very easy to become an American and very hard to become a Japanese. Koreans who were born in Japan and have lived there all their lives are still not accepted by the native Japanese not even as much as Turks who have lived far less long in West Germany are accepted by the native West Germans. Such is the cultural obsession with national purity that Japanese companies in Latin America do not even trust second-generation Brazilian Japanese to take managerial responsibility in running their

Brazilian subsidiaries. As the British would have put it in the days of the Raj, they are considered to have "gone native", to have lost their pure Japanese cultural status. By contrast, as American semicitizens are aware, it is not difficult for foreigners to merge into the American melting pot. And once in it, the American free enterprise culture emphasizes the opportunities of upward mobility, economically, and afterward socially. It is much easier in the United States for foreign students to work their way through college or for foreigners to buy property and establish rights of residence in the United States than in most other countries of the world. As European and especially British imperial experience showed, racial discrimination is a major handicap in running and maintaining a stable and successful empire. The Americans have less of it than most. The absence of an alternative that is both stable and acceptable is .therefore the rationale for pushing theory building in international studies toward some reexamination of those policies for governing an empire that are essential and ineluctable and those that are less essential or even counterproductive. There is no lack of historical material here to draw on. For example, it suggests that direct rule is not necessary for stable i m perial government. Direct British rule in India coexisted with indirect control over the Indian princely states. They were only taken over or interfered with as in Oudh - in cases of grossest incompetence or the most extreme strategic necessity. Even in Africa, the British managed a dual system, governing indirectly through tribal chiefs and directly through district commissioners who were sometimes almost beardless former public schoolboys given authority over hundreds of square miles of territory. Experiences suggests that one of the recurrent problems for imperial powers and one of the most difficult - has always been how much support and in what form to give to the local rulers and how much to interfere in their decision making. The United States currently faces p r e cisely this problem both in South Korea and in the Philippines, s The evidence of history also suggests that among the policy areas requiring close imperial control are defense and communications. How the imperial armed forces protecting the empire are to be recruited, equipped, commanded, and paid for has always been a major policy question - as it is now for the United States and its NATO allies (Calleo 1987). In communications so vital to the cohesion and control of any empire from Rome and ancient China to the U.S. - dominated financial system of today - the question who shall have access to the means of communication, how these shall be paid for, and what they may be used for in addition to the messages of state remains a crucial one. Students of international organizations familiar with the history of INTELSAT and MARISAT will readily appreciate the similarities of U.S. policies to those of the Roman and Chinese empires, with their roads and

pony express systems, and the British and French empires with their steamship routes, their air routes, and telegraph and telephone cable links. Not every state is well suited to an imperial role nor to act as leader of an affluent alliance of protected states taking collective responsibility for managing the world's monetary, financial, and other economic affairs. It would seem from historical experience that two variables will make for good imperial government. One is a political philosophy that has some universal appeal to fundamental ethical principles, and which will therefore find an echo in the hearts and minds of affluent associates and less affluent "subjects". The other is a political system, whether formally run according to a written constitution or not, that allows the coordination of policy directed at the imperial state with other policies directed at the government of the empire. (The semi - independent status of the India Office in nineteenth - century Britain is one good example of this.) The United States is more fortunate on the first count than on the second. It was a state inaugurated with a formal Declaration of Independence that embodied universal principles of liberty, equality, and democratic control. It does still pay lip service to these ideals though there is a persistent conflict between those who believe that the principles apply primarily within the United States (and that therefore the United States is an exceptional country), and those that see the principles broadly described as political human rights as having universal validity - or at least as ultimate goals. In recent years there have been signs of growing awareness in Washington of the long-term U.S. interest in a more stable and growing world economy and of the need to adapt U.S. policies (for example, on development finance to the Third World) to this imperative. There are therefore some grounds here for optimism. The outlook for change in the U.S. political system is less favorable. The Constitution (whose bicentenary was recently celebrated with such piety and devotion) was obviously admirably adapted to prevent tyranny and ensure freedom for a developing country on the periphery of the world system. A matter for serious consideration now is how it could be adapted and improved for the future in such a way as to enable the United States to avoid the blind unilateralism, the violent changes of foreign and financial policy, and the short-sighted selfishness of its commercial policies that have marked recent years. Even more difficult are the central political questions of legitimacy and hegemonial power as understood by Gramsci. A common weakness of most territorial empires is the risk of allowing rivalry to develop between military and civil authority. Dependence on the military for the defense of the territorial frontier has always threatened the political stability of constitutional empires as the example of Julius Caesar in the early Roman empire showed. It seems

that concentrated military power corrupts more quickly to the detriment of civil society within an empire. The American nonterritorial empire c e r tainly has the strength of an efficient communications system. The very fact that it is nonterritorial ought to make it possible to curb the power of the military within it because, although power in the security structure is one source of strength for the United States, it is not by any means the only one. The military interest is balanced by industrial and financial interests, as in Britain's nineteenth - century empire, and this may well be a source of strength. A reasonable hypothesis for such a theory might be that a nonterritorial empire will remain strong and stable as long as there are shared interests between the dominant center and important sections of society in the peripheral parts of the empire. These shared interests would maintain a sort of internal balance of power preventing disintegration. This at least seems to be a conclusion that could be drawn from the history of federal states in recent times. In all of these there is a latent danger of secession, jeopardizing the cohesion of the state. Think of Bavaria in the Federal Republic of Germany, of Quebec in Canada, or the deep South in the United States. Earlier on, there were other examples, like Bohemia in the Habsburg empire. In each case, coercive power was more effective when it was tempered with placatory concessions. But equally, coercive power has sometimes to be used to prevent secession or unilateralist revolt. An instance was when the Australian Commonwealth government had to act forcefully in the 1930s to prevent New South Wales the largest and richest of the states of the Australian federation from defaulting on its foreign debt. Or when the Indian government more recently has had to use force to prevent secession by the Sikhs. The result of a lack of such coercive authority can be seen in the failed East African federation and possibly in the future in Yugoslavia after Tito. A theory of nonterritorial empire would seek to ask the political questions of which problems were the same as in territorial empires, and which are likely to be different. And it would ask though from a totally different point of departure some of the same economic questions as those posed by students of "interdependence". How, for instance, can an international banking system be effectively managed without the risk of panic or collapse? Or, how can a Keynesian policy of demand management be effectively developed to stabilize a flagging world economy? These are questions that will find no answers so long as they are approached from a state - centric point of view. Only by assuming the existence of a nonterritorial empire may we be able to find the way in which policy could be moved. It would seem to me that the recognition by U.S. scholars of the full implications of the structural power of the United States would lead in

nany interesting new directions and would produce many more construct ;ive and creative ideas for policymakers than the present obsolete, state:entric, territory - bound debates that ignore some of the fundamental :hanges that have taken place in the world political economy in the last ,wenty-five years.

References Aaron, R. (1958): War and Industrial Society. $tevenson Lecture, London School anied by the emergence of modern nation - states (see Amin 1989): the levelopment of national policy and the internationalization of the economy is well as the drawing of political borders against the economic challenge o such borders can not peacefully co-exist in the long term. In each :ase, this dilemma was solved by one nation - state's use of its superior nilitary, political and economic powers in securing both an international 3rder of economic expansion and a political "equilibrium of power." Other national powers were severely limited by the hegemonial nation. At the seginning of the history of the capitalist world system whose place of :ommencement was Europe - the hegemonial powers were Portugal, then Spain, and in the seventeenth century, the Netherlands. During the eighteenth century, Great Britain emerged as the hegemonial power. She defended this position in the early nineteenth century through the Napoleonic Wars, and proceeded to define world history through the "Pax Brittanica" up until the 1920s. Although the United States had already emerged as the new great industrial power during the final third of the nineteenth century, it was only in the 1930s that the U.S. began to depart from the policy of "splendid isolation" and take seriously the role of economic leadership appropriate to her economic power. This aspect of global history is not further exciting up until this point as the representation of the development of the capitalist world system is so general, that it is simultaneously correct and incorrect. The former applies to longterm tendencies, while the latter refers to that which becomes evident

1

(Various types of authors belong to this group: Wallerstein 1984; Modelski 1981; Thompson 1983; Kennedy 1987, etc.).

after a closer inspection of individual phases, and the socio-economic tendencies upon which they are based. However, some authors (e.g. Modelski 1983) develop the abstraction one fascinating step further. TTiey argue that one can depict political cycles, each split into four phases, which run approximately parallel to the 3 0 - 5 0 year "long waves of economic growth" named after Kondratieff. Each of these political cycles corresponds to the rise and fall of a hegemonial power and its corresponding hegemonial order. The epoch of uncontested world power (phase one) is followed by the "delegitimation" stage, meaning the phase in which the hegemonial power is challenged at the international level. Thereafter comes the phase of "deconcentration". Here, the means through which hegemony is exercised begin to erode and other competing powers begin to emerge. These rivalries culminate in a world war (cycle four), in the course of which the defeat of the old hegemonial power enables a victo rious power to proclaim itself the new hegemonial power. These phases of the hegemonial cycle correspond to the phases of the long economic cycles: The rise of the hegemonial power is connected to a prosperous, expansive world economy, while the decline of the same takes place against a background of a long wave "with fundamental stagnative characteristics" (Mandel 1972; 1980). What remains unclear and debatable, however, is whether causal relationships exist between these "cycles." This question will not be further explored here. We wish to limit ourselves to the phenomena of the U.S. - American "hegemonial cycle." A cyclical model suggests something like historical inevitability that is, an unavoidable and inexorable sequence of phases of the hegemonial cycle. In the face of this historical "logic", the political, economic and military decision - makers have, at most, a very limited effect. When one uses this model as a basis, the following question immmediately arises: in which phase of the "U.S. American hegemonial cycle" do we presently find ourselves? Are we in the phase of delegitimation, of deconcentration, shortly before a World War - or more appropriately a War of World Destruction which would close the final hegemonial cycle of humanity, since no living being would be able to survive, no less a nation which would be able to come forth with hegemonial expectations? Although this cyclical model seems plausible for the purpose of retrospective analyses, there are good reasons why it is not especially applicable to an understanding of the current state of the world. This can be explained through a summarizing look at the short history of the "U.S. American empire." It cannot be contested that the USA has been an aspiring economic and political power in the world economy since the end of the last century. According to the research of Angus Maddison (1987), in 1890 the average productivity of the U.S. economy had already surpassed that of Great Britain, the leader at that time. After the first World

War, the USA became the uncontested strongest industrial nation, overshadowing all european powers. The industry of the "new world" was at the leading edge of technologigical progress and economic rationalization: there, on the other side of the Atlantic, the principle of "Fordism" was developed (see Aglietta 1979). This refers to the social rules of fully rationalized mass production in the factories, together with economic and political methods of stimulating effective demand, plus a mass consumption norm founded on specific wage policies. These norms and rules were valid and imitated throughout the world well into the nineteen seventies. In the course of the World War I the United States transformed into a "Supercreditor" within the global financial system (Polanyi 1978). All European nations became debtors to the United States. Wall Street kept the financial system afloat with short and long-term credit. The systemr collapsed, however, in Europe (especially in Germany) when U.S. firms and banks began to liquidate and repatriate their European and Latin American investments after the Crash of 1929. Germany was only able to pay its reparations for a time due to a harsh austerity program associated above all with the name Briining- which reduced imports and increased exports. However, the pyramids of credit which were built upon short-term debt began to crumble. The depression followed, bringing with it mass unemployment (1929) and a postponed financial crash (1931). In this period of sinking raw material prices and shrinking markets, many Latin American nations also lost the capacity to service their debts. They were forced to halt interest payments (as would reoccur 50 years later), try to restructure non-payable debts, or, as in the case of Bolivia on January 1, 1931, declare State bankruptcy. In the thirties, the USA already defined the conditions within a western Alliance developing in response to the fascist axis. In the forties, a global institutional system was created over which the USA undisputedly presided as it expanded during the 1950s. Perhaps the USA would have ripened into the hegemonial power of the twentieth century in any case, just as Toqueville (and Marx) pre-' dieted in their nineteenth century works. But, it cannot be disputed that "God's own Country" became a hegemonial power as a result of two World Wars. Through these wars the USA legitimized itself for the hegemonial role as well as concentrated the economic, military and polit-*' ical power with which it would later secure hegemonial order. So far, the historical process seems to conform to the theory of hegemonial cycles. Dominance and Hegemony in a Bipolar World

V

However, for the first time in history, the hegemonial order of the Tax Americana" applied only to the "western" half of the world and not few*

the world as a totality. The "eastern" half integrated to the "socialist camp" under the hegemony of the Soviet Union. The superpowers became rivals in a bipolar world which tended towards tripolarity after China seperated itself from the real - socialist block. The U.S.'s function o r maintaining hegemonial order became split; on the one hand it had to deal with the issue of the "enemy" camp which must be contained, above all by the expansion of military power. On the other hand, the USA had to stabilize the economic, political, military, and cultural relations within the Western Alliance itself. Within the East-West confrontation, the USA and the "Allies" to which former wartime enemies also belonged could only achieve an "equilibrium of deterrence". The reciprocal threat of atomic destruction stabilized two camps, and only on the "edges" did conflicts of war erupt. Since 1945, nevertheless, 160 wars have been waged, and of these, a p proximately 100 have been intervention wars in which one of the superpowers has openly participated. In this sense, it seems as if something only changed insofar as the level of reciprocal deterrence was able to be downwardly revised through a partial disarmament, but also upwardly revised through new armamant competitions. In this situation a conflict was conceiveable when an unmanageble independent technology succeeds the "logic of extermination" (E.P. Thompson) of the system of deterrence (an atomic war is begun accidentally, or because of misinterpretation, or "human failure") or, the continual conflicts provoked on the edges of the block-system transcend the border into the center, despite all containment efforts in the form of disarmament and peace initiatives. The USA has been the dominant nation since the Second World War within the western capitalist system the "holy alliance of anticommunism" of "the free west". As such the U.S. was also the guarantor of the hegemonial order. As Susan Strange (1988) describes, the USA has had "relational power" within bilateral and multilateral relationships among nations (this could be named dominance), as well as "structural power", exercised on the basis of shared norms, institutions, and forms of c o operation; that is, on the basis of consent ( this corresponds to the definition of hegemony). The most important conditions enabling one nation's (economic) dominance in the world market are: comparative advantages in the production of first quality - products; the ability to provide for the strategic raw material needs of the hegemonial economy and its allies (oil, for example, due to the energy - intensive industrial model); the ability to regulate the international currency and financial markets so that the national money functions as world money and the national financial system as the anchor of the world financial system. The national economy must also be large enough to act as a "locomotive" in stimulating the development of the world economy. Furthermore, an economically dominant

land is also militarily superior. Finally, the dominant nation must culturally and ideologically influence the entire global society. This so described relational power, however, can only form the basis of a hegemonial order (structural power), when the mentioned conditions become anchored in an international institutional system, and all other nations accept the rules developed by the dominant nation. Hegemony always includes dominance, yet a dominant nation does not automatically develop into a hegemonial power. As long as the world economy expands, the monetary system functions and international credit relations finance productive and commercial loans, all involved parties take part in the gratifications of the system. The benefits, however, are never simul taneously, and always unevenly dispersed, and the system itself is never free of conflict. The costs of integration into the hegemonial order, and the recognition of its demands, are in any case less painful than those tied to the option of a "seperation" from the world market or as a strategy of selfcentered development. The dominant nation can exercise economic pressures and make political demands, yet these become - as Gramsci said armoured by the more powerful lever of consent which is inscribed into international structures, promoted by international institutions, and whitewashed with the ideology of freedom and the market. As a hegemonial nation, the USA is in a more exposed position than any other in the history of the capitalist world system. This is because of the double - dimensioned need to secure the hegemonial order within the order itself, and without, in reference to the Soviet Union. Theorists of hegemonial cycles generally argue that economic superiority within the global society is the crucial basis for political and military supremacy. This, in turn, enables the establishment of an international political order tapered to the rules of the game set by the hegemonial power (structural power). Because the political and economic structures of the world system are not congruent, a leading national power can, and must emerge (see Schmidt 1988, p. 384ff.). Although all nations within the system profit from the political and ideological regulation, and especially from economic expansion, the hegemonial nation profits most. It is able to pocket a "Seignorage", exemplified by the role played by the national money (the dollar) as world money (see Kindleberger 1984, p. 30). This double function of the dollar allows the USA to create money and credit, and thus lay claim on the value produced by other economies: The USA is able to finance the export of capital and thus the transnationalization of U.S. firms (as was done into the nineteen seventies), or it can afford an enormous trade deficit without fearing an inability to pay (as is being done in the eighties.) Naturally, this only holds as long as the dollar is accepted as world money - meaning as long as international contracts are denominated in dollars. This acceptance is not least dependent on the

economic security of the world money (i.e. the stability of its value) and especially on its rate of appreciation (i.e. the interest rate in the USA). In this manner economic supremacy, - that is, the prerequisite for dominance and hegemony can be expanded further in relation to the hegemon's competitors. The hegemonial order sets in motion a positive feedback mechanism for the superpower itself. This is certainly neither stable nor set up for the long term, because options are available to the competitors which will call the relative competitiveness of the hegemonial power into question. Such a catch-up process has defined world e c o nomic development since the middle of the nineteenfifties. The Western European nations unexpectedly succeeded in quickly closing, for the most part, the "technological gap" with the USA, and as long as they lagged behind the USA in the field of labor productivity they remained competitive by keeping unit labor costs and therefore prices correspondingly competitive (Altvater/Hubner/Stanger 1983, p. 38). Japan followed with principally the same strategy one decade later. In such a situation, the seignorage enjoyed by the leading power can not only disappear, but may also transform into a disadvantage. The exercise of hegemony - that is, assuming the responsibility for the system's function as a whole - becomes an economic burden. This was especially the case in the decades following the Second World War. Then, the USA was not only responsible for the maintenance of military supremacy within its own block, but also for the extension of the "military umbrella" over the western system against the Soviet Block. Because of these double burdens, the U.S. had comparatively high military expenses. While the U.S. spends more than 6% of its GNP on armaments in the 1980s, West Germany spends only 3.4%, Great Britain close to 5%, and Japan spends less than 1% on the non-productive (or better, nonreproductive) arms industry (see Schmidt 1988, p. 395). Because of their comparitatively lower military expenditures (measured against GNP), competitors of the U.S. were especially able to invest more public resources into the area of infrastructure. With the use of these resources the "productivity gap" in relation to the USA was largely overcome (see Cuomo Report 1988). The fact that the U.S.'s economic competitors did not have to compete militarily with the dominant power for the first time in the history of hegemonial order, proved advantageous to the U.S.' competitors. The hegemonial power was, however, tied to an arms race with the enemy hegemonial system. w The economic conditions upon which the dominance of the USA was built became undermined, due to the fact that the USA raised the e c o nomically costly military stake in its armament competition with the "socialist camp." Relying on what seemed to be superior economic resources, the U.S. attempted to turn the "equilibrium of deterrence" to its

advantage by "arming the Soviet Union into economic bankruptcy". It is well known that this strategy had a high price. But with the help of this strategy, the relationships within the capitalist world system have transformed so fundamentally, that the notion of a U.S. hegemonial crisis is fully plausible. The decreasing competitiveness of many branches of U.S. industry is confirmed; the "productivity slow down" is the theme of many books. In Mario Cuomo's Report of the Commission of the Governor of the State of New York, 'Trade and Competitiveness", he expresses deep concern over findings which prove that on the average, Western European and Japanese productivity has almost caught up to that of the U.S. In 1970, in comparison, these countries' productivity rates remained 30% behind the U.S. (Cuomo Report 1988). The decline of the dollar is interpreted as an expression of crisis as well as its temporary and unprecedented peak is seen as a symptom of crisis, although due to different reasons. In addition, the United State's slide from a strong creditor's position into a debtor economy of unprecedented proportion, plus the increasinng "financial instabilities" which fail to stabilize - all of these are strong indications of a hegemonial crisis. The opposing viewpoint argues that to speak of a hegemonial crisis is to highly overdramatize the facts of the situation. To speak of a crisis, some say, one falls directly into the rhetorical traps of liberal economists and politicians, who throughout the world complain of lost, or endangered competitiveness, and thus attack the "costly" welfare state and unions with the argument "The World Market made me do it". One must furthermore take into account, they continue, that no other competing nation - neither from Western Europe nor from Asia approaches the United State's financial superiority. Neither are there true competitors in certain high technology sectors (electronics, space travel, armaments). Additionally, the counter-argument holds, the indicators commonly used to support the thesis of a hegemonial crisis are not entirely relevant. For example, one cannot infer declining U.S. competitiveness from a declining share of U-S. exports in the world market, because especially in the case of the US, - a large portion of foreign economic activity is transacted by VJSL American transnational corporations whose products are not encompassed by the national US statistical indicators. It follows, therefore, that talk of a hegemonial crisis is simply an ideological smokescreen stoked by statistical methods. Without doubt, there are good reasons for such objections. They should not, however, be read as if economic, ideological, political and military structures have not fundamentally changed. To us, these change^ seem to be consistent with the previously developed concepts of dom^ inance and hegemony. Dominance and hegemony may not only diveige from each other, they may very well contradict each other. The dominance

of the superpower within the world economy can be maintained precisely in that the material bases of consent and therefore of the hegemonial system are undermined. This occurs when the hegemonial power loses its industrial superiority, employs "unfair means" to protect themself, and potent competitors appear. And it also occurs when the national money of 'the superpower is no more accepted as the uncontested world money. As • a result, a currency crisis is brought about, resulting in a devaluation of fthe national money and consequently, of the stock of world liquidity. LCurrency reserves decline in value and central banks must book c o r responding losses. When the financial system does not continue primarily to perform the function of securing productive credits, but becomes entwined in speculative capital movements, the system enters into a zerosum, or even negative-sum game. While productive credits spur the expansion of the world economy and thus enable all participants to reap the rewards of expansion (positive sum game), speculative finance only produces winners at the expense of the losers. In the game of "Casino Capitalism" (Strange 1986), only the bank 'can win in every case, in this case the financial system of the US which -mediats the great bulk of international commerce. Furthermore, when the c ideological evocations of the "american way of life" is satirized in the most |hip of Hollywood TV series, then the consensual basis of U.S. hegemony lis really endangered. "Structural power" can then be instrumentalized at |the expense of the hegemonial system's functional mode; that is, to the disadvantage of other nations. The existing hegemonial system does not further mediate gratification for all participants, but mediates advantages for the hegemonial power and disadvantages for many others. During such a systemic process of transformation, the former hegemonial nation [becomes reduced to a dominant nation. Susan Strange. (1988) named the ttype of nation which assumes this position in the world market a "predagtory hegemon". jp Leaving aside its overwhelming military power, the dominance of the IVSA today is essentially based on monetary and financial relations and | not, as previously was the case, on real economic superiority. The fatal | aspect of this is that these monetary links sap the hegemonial consensus, Ifinancially strangle a number of countries ( the Third World debt crisis) land bring forth financial instibilities which hold the potential of a global |economic crisis. The U.S. "hegemonial crisis" can not be understood solely las the inability of the U.S to achieve specific forms of economic mangagement in the world economy, as the literature on hegemonic instability •argues. The hegemonial system will be undermined above all when the Iformer hegemonial nation unilaterally attempts to instrumentalize the ^Structures of the world economy and, in doing so, heightens the potential ^for world economic conflict.

I

On the way toward Casino Capitalism? This perspective can be sketched as a type of vicious circle (see chart) which exhibits a number of stations. These, along with the means by which the vicious, circle may be broken, shall be explored in the following sections. First: The "hegemonial crisis" of the USA was initiated in the late 1960s as U.S. firms lost their competitive edge, and European andi Asian competitors began to catch up to their U.S. counterparts- However,, it must be recognized that U.S. firms themselves promoted this process* Since the introduction of European currency convertibility in the late 1950s, the U.S. has increased its direct investment in Europe (and Asia) compared with its engagement in Latin America for instance. In effect, U.S. corporations imposed new technologies and management techniques onto the competition, thus raising the competitor's productivity. Had these investments been placed within the U.S., greater productivity gains, would have been realized within U.S. borders. Therefore* when one speaks of a decline in U,S. competitiveness, it applies, only to the territorial economy of the U.S., not to the transnational corporations; which continue to operate competitively throughout the world. However: both the investment rate and the investment quota measured as the share of investment to profits, and to the national p r o duct respectively - have declined in the U.S. more than in any other developed nation. This tendency is responsible for the fact that since the late 1960s, modernization and innovation within American industry has lagged behind its competitors. One resulting consequence has. been the so-called "productivity slew down": the average growth rate per year in the US manufacturing industry amounts to 25 % in the interval! ISfifl 1980; the repective rates of Japan und FRG were 7.4 resp. 4.9 One other consequence has been the erosion of the "fordist equiMbriuna", which was based upon wage increases (demand) at the approximate pace of productivity increases (supply). When productivity gains slow and individual wages stagnate (the ease since the 1970s), the social wage and consequently the unit labor costs increase. The effecting price pressures cm then only be dampened in the world market through currency depreciation. Second: This is obviously not a sufficient solution. The U.S. trade balance in the 1970s was negative. It was not a coincidence that the repeal of the gold convertibility of the dollar also wrested the crucial support from the post-war currency system: for the first time since 18S1» in 1971 the U.S. trade balance became deficitary. This did not dkectfy result in problems for the U.S. or for the world economy, due to the fact that the balance of current account, which includes services, capital yields

The Vicious Circle of the U.S. Hegemony Crisis

1 Declining — • 5 Deterioration £ Comptetltive of the trade ness of the balance S- U.S.A. (Real Economy) (causes

• 3 Declining - h * 4 Crisis of h -Attempts to stabilize the the world exchange rate exchange rate money as a of the $ by monetary means of cirmeans culation

y not to be con • sidered here)

a

13

a

Rising inflation

5 Loss of real value of all $ denominated contracts

Attempts to rise prices

12 Slow down of technological innovation and | Implementation f Tertlarlzatlon of the economy Decrease of p r o - ductive investment

Oil shock •

Declining prices of raw materials

Transition to a multy currency standard Growing value of collateral

Incentives for Increasing Indebtedness ^

Rising In terest rates

\

7 Growing instability of currency markets; emergence of an international credit system Incentives for speculative c u r rency movements

.

J

» Recycling 8 Growing debts of PetroI and M e t r o - $ T Increasing debt burden

Changing strategies • of corporations: Interest oriented Instead of profit seeking

Expansion of the international credit system, based in the U.S.A.

Loss of the sovereignty of economic policy

Growing M volatility, Instability of financial markets

10 Increasing attractiveness of the $ as a means of payment Financial Innovations

and revenues, remained positive. As long as this was the case, the U.S. continued to export capital and supply the world economy with sufficient international liquidity. Since WWI the U.S. has played the uninterrupted role of creditor to foreign debtors, and was even able to build on its position of creditor. Only since the early 1980s the balance of current account has become deficitary. As a result, the U.S. has transformed itself into a country which must import short and long term capital, constantly moving towards the status of a debitor nation. This has been accompanied by a complete restructuring of international creditor - debtor relationships, and by a dismantling of the post-war credit regime. The post - WWII U.S. balance of payments has developed in the following manner (divided generally into decades): THE US BALANCE OF PAYMENT AFTER WORLD WAR II - in bio. of $; aggregated balances Period trade balance current account

1950/59

1970/79

1980/89

29.3

40.8

-103.8

-919.3

6.0

33.3

4.3

-808.3

-27.8

- 35.4

363.6

(1952)

(1962)

(1982)

50.0

27.4

capital balance (longterm) exchange and gold reserves (as % of world reserves)

1960/69

8.3

(1987) 6.7

In Trade balance and current account; + means a surplus while - means a deficit. In capital balance; is net capital export and + is net capital import. Sources: Economic Report of the President 1988; OECD 1988. Datas for 1988 and 1989 are preliminaiy. Datas for the capital balance embrace 1980 to third quarter 198/. On the one hand, the deterioration of the U.S. balance of payments may be viewed as a symptom of the 'Triffin Dilemma" which has been discussed since the late 1950s. This holds that a hegemonial power which supplies the world economy with liquidity in the form of its national money necessarily must accept a balance of payments deficit: that is, either a deficit of current account, a deficit in the capital balance, or a reduction in currency reserves. Precisely this, however, undermines the strength of the national money of the hegemonial power. This is fully acceptable as long as no other world money which is simultaneously

national money is available. Because the distribution of world money is dependent upon the existence of a "World Government (State)", it is highly unlikely that a situation such as this would arise. The drama of the "Dollar Crisis" stems less from the Triffin Dilemma within global, monetary relations, than from real economic developments within the U.S. economy which severely weakened the dollar. If the dollar were a "normal" currency without the additional function of world money, a devaluation would be a prerequisite for improved U.S. competitiveness. But the dollar is the internationally recognized contractual currency. Changes in the dollar's value therefore have destabilizing effects not only on the U.S. economy, but on the global economy as a whole. Those who do not recognize the balance of payments deficit and sharp changes in the dollar's value as a problem, but see these merely as innocent and non- biased effects of market mechanisms, obviously do not take the above-mentioned phenomena into consideration. Third: A weakening of the dollar signifies nothing more than permanent pressure for devaluation. Within the fixed-rate system which existed until 1973, exchange rates - set in the 1960s when the dollar was already overvalued - had to be defended; adjustments were only possible within the framework of complicated negotiations within the IMF. A network of international institutions was constructed in order to defend the dollar against market tendencies. This included the General Agreement to B o r row; Swap agreements, the Gold Pool, Special Drawing Rights, etc. However, even this network was not strong enough to control movements of private capital speculating on the dollar's devaluation. The dollar's descent began in spring of 1973 when the system of fixed exchange rates was forced to be definitively abandoned. From 1972 until 1980, the dollar lost 44% of its value against the German Mark, while during this same time period it's weighted value in relation to the currencies of the industrial nations as a whole declined 17%. A currency which loses its value over time becomes far less attractive as an investment currency to financial investors. It is no wonder, then, that currencies such as the German Mark or Swiss Frank in part replaced the dollar as a reserve, trade, or intervention currency. A market - regulated, oligopolistic "multi - currency standard" was created on the ruins of the post-war politically regulated, international monetary system (single currency standard or Gold - Dollar Standard). The dollar remains as the most important and dominant currency, but it has become "deconcentrated" by competing currencies. Above all, the dollar is no more the medium of political regulation oriented towards the goal of full employment, but has become the medium of capital investors seeking short-term speculative profits from exchange rate developments and interest rate movements. Robert Triffin (1988), therefore redefines the logo of the IMF as the

"International Monetary Scandal." John Williamson (1988, p. 213) sums it up in the following manner: "Since 1973 the world has lived within an international monetary ,nonsystem\" Fourth: The external devaluations of the dollar in the 1970's corresponded to internal U.S. inflation which then spread throughout the, world economy. (From 1970 1981, the average yearly increase in c o n - ' sumer prices was 7.7%.) When high inflation rates tend to devalue dollar,, denominated contracts in the world economy, it becomes a rational r e action to either close these contracts in other, more stable currencies,; and/or to adjust the price of goods to the inflation rate. In order to, realize this option, however, two prerequisites must exist: First, the inter-< national supply of money and credit must grow substantially faster thaXL "real economic" dimensions such as productive potential, GNP and worll>. The Challenge of International Policy Coordination

^

One crucial point in our discussion of the international monetary system isj the tension between the dollar as primary form of world money and the; gradual erosion of U.S. hegemony. Repeatedly, in 1971, 1973, 1979, and 1987, this problem led to dramatic sequences of monetary instability which^ required major changes in institutional arrangements and policy. Gradual^ adjustments based on continuous dollar devaluation (e.g. 1971-3, 1976-9, 1985-7) have not worked. Each time this strategy eroded confidence in^ the dollar before it managed to improve underlying trade imbalances. ^ These failures of adjustment are no coincidence. They express serious flaws in the system of flexible exchange rates and competing key curren-^ cies. Historically such a system has arisen whenever the leading economic' power loses its absolute dominance and therefore can no longer maintain^ its currency as world money within established institutional arrangement^ (see the collapse of the gold-pound standard in 1931 and of the gold-^ dollar standard in 1971). In both instances, during 1931-44 and 1973-87, L flexible exchange rates encouraged competitive devaluations. This form of? monetary protectionism contributed in turn to the disintegration of the., world economy into separate and increasingly adversarial power blocs,'a^ can now be seen by U.S. emphasis on bilateral agreements (e.g. Canada^ Israel, Carribean Basin Initiative) and a tougher trade policy v i s - a - v i s ft(t; main competitors, Japans's aggressive efforts to increase its influence ,;fll; the Pacific Basin, and the EEC's preparation for a new level of economtt integration by 1992. The deregulation of exchange rates (in 1973) and of interest rates (in 1979/80) made those two key prices of money much more volatile. This attracted a lot of speculators hoping for rapid capital gains from correct guesses about short-term price movements. Helped by financial innova^ tion (e.g. Euromarkets, financial futures), this activity became the dominant force in the world economy16. Currency speculation tends to exacerbate underlying imbalances in trade and capital flows which in turn may feed y 16

According to official estimates (see Michael ANDREWS, 1984; BANK OF ENGLAND, 1986), the daily volume in foreign exchange transactions now absorbs lp to $200 billion of which about 80% constitute short-term capital movements for speculative gains.

the instability in currency markets. Moreover, no single country has enough reserves to defend its currency against a determined speculative attack, as found out by Britain's Labour Party in 1975, Carter in 1979, the SPD in 1980, or France's Socialists in 1983. The Louvre Agreement of February 1987 must in this context be seen as an important change in the management of world money. Its immediate objective, the stabilization of currency prices within flexibly managed target zones, discourages speculation by providing for coordinated central bank interventions and reducing exchange - rate volacility. Moreover, Louvre marks a first step towards a new institutional framework of international policy coordination. No amount of central bank intervention can keep exchange rates stable over time, unless the leading ICs bring their respective policy mixes into better balance to remove underlying imbalances in trade and capital flows. First examples of this process were the simultaneous interest - rate reductions in the USA, West Germany, and Japan during 1986 and current efforts of these leading powers to address their fiscal policy mismatch. Under the Louvre Agreement the G - 7 countries have also agreed to introduce an economic surveillance system, including country-bycountry forecasts and commodity prices (e.g. gold, oil), as the basis for their regular reviews and policy decisions. In an effort to move this pro:cess along U.S. Treasury Secretary James BAKER suggested in May 1988 that the G - 7 countries begin coordinating "structural reforms," such as tax Revision and financial deregulation, as well as macroeconomic policy. In ^addition, he also proposed to strengthen the surveillance apparatus by [establishing "monitoring zones" for key economic performance indicators. |Under this new review system countries would have to consult other G - 7 [members about possible remedial action if their indicators fell out of the nones. P^ This gradual movement towards international policy coordination is a Jjyproduct of an increasingly interdependent and polycentric world e c o iomy. Dramatic advances in computer and telecommunication technologies Jiave accelerated the trend towards globally integrated production networks £Uid financial markets. This has been accompanied by a growing dependjpnce of all national economies on trade, as stagnating markets have forced producers to expand abroad. Even more importantly, the post -1982 Recovery has depended above all on managing the LDC debt crisis, pport-led growth strategies, and the huge U.S. budget and trade deficits r8S the engine of worldwide stimulation. This global growth pattern, forcing jthe USA into an open economy, requires very different stabilization p o ftcies than the essentially closed U.S. economy of yesteryear. But this growing influence of international policy-making is by no itneans a smooth process. While the internationalization of capital accu-

mulation and resource mobility has obviously reached a qualitatively new level in the 1980s, the world economy is still very much dominated by its institutional organization in nation - states and their pursuit of national interests. Capital is at once both international (in its expansion drive) and national (as social organizations operating within country - specific institutional settings). This double - existence means that multinational corporations and transnational banks compete with each other also as natumoi, capitals whose conflicting interests are defended by their respective nation - states. That complicates international policy coordination, especially today when the leading economic powers (i.e. USA, EEC, Japan) face each other as relatively equal rivals battling for global domination. This problem is clearly reflected in the Louvre Agreement as well' The USA is pushing Germany and Japan to reduce their surpluses by reflating their domestic economies, while those two powers insist on stronger U.S. efforts to bring its twin deficits under control. This struggle over the distribution of adjustment burdens is accompanied by a plethora of conflicts over trade issues and military burden - sharing. ConsequentJy, efforts to institute more formal mechanisms for coordinated policy ad-, justments have been hampered by the resistance of governments to see their power over domestic policy-making subjugated to an international body. In this context it is important to understand that the primary objective of recent U.S. proposals for coordination of "structural reforms'! and "monitoring zones* was not so much to strengthen Louvre's policy apparatus, but to prevent more ambitious initiatives by the EEC or Japan for international monetary reform. ^ Under Louvre, the U.S. still enjoys its seigniorage benefit at (he expense of the other powers. First of all most official interventions in the foreign exchange markets come from the other G - 7 countries, with the European and Asian central banks buying about $125 billion in 1987 akme to keep the dollar stable. These central bank purchases of dollars are then immediately reinvested in U.S. government securities. A major portion of America's twin deficits has thus been financed by foreign central banks. But their loans do not appear as a U.S. liability in its official accounts1** In other words, these loans do not require the USA to collect a corrresponding sum from American disposable incomes through borrowing 17

In 1976 the U.S. Treasury reformed its balance - of - payments accounts to .avoid acknowledging that holdings belonging to foreign central banks were a liability for the USA. This move, a dramatic expression of seigniorage, was justified on the grounds that after the closing of the gold window in August 1971 foreign monetary authorities no longer had any claim on U.S. official reserves. At the same time dollar - purchase* of central hanks expand their domestic money supplies by creating additional powered money" (i.e. bank reserves).

and/or taxation. Consequently, these incomes remain available to be spent on imports. Once again the USA can escape the burden of adjustment, while the other countries have had to neutralize their dollar purchases by restricting domestic money creation. It borders on hypocrisy for U.S. policy - makers then to accuse Germany and Japan of conducting overly restrictive monetary policies. What would the level of U.S. interest rates have been without this support from foreign central banks? The Louvre Agreement is therefore incapable of dealing with the structural imbalances between the G - 7 through properly balanced a d justments. It does not address the fundamental problem of having the dollar as world money when its issuer, the USA, has become the world's largest debtor nation. On the contrary, it actually aggravates that problem, since it allows the USA to avoid necessary adjustments by abusing its seigniorage. Ultimately, the problem can only be dealt with by replacing national currencies as world money with a global payments system based on supra-national credit-money (e.g. an extended version of European Currency Units or Special Drawing Rights)18. Voluntary creation of such a system is unlikely, given today's dominance of clashing national interests in a polycentric world economy. This next stage in the historic evolution of world money will only occur, if and when policy - makers respond to global crisis and deepening conflicts by increased cooperation. 4 References Aaron, H. et al. (1986): Economic choices 1987 (Brookings Institution: Washington D.C.) Andrews, M. (1984): Recent Trends in the U.S. Foreign Exchange Market, in: Federal • Reserve Bank of New York Quarterly Review, 9 (2), pp. 3 9 - 4 7 . Bank of England (1986): The Market in Foreign Exchange in London, in: Quarterly i Review, September, pp. 379 - 382. Guttmann, R. (1985): Crisis and Reform of the International Monetary System, (Thames Papers in Political Economy: London, U.K.) Kindleberger, C. (1985): The Dollar Yesterday, Today, and Tomorrow, in: Banca Nazionale del Lavoro Quarterly Review, pp. 295 - 308. Magdoff, H. (1968): The Age of Imperialism (Monthly Review: New York) Tarshid, L. (1987): Disarming the Debt Bomb, in: Challenge, May-June, pp. 1 8 - 2 3 .

h

Editor's note: For reasons of space-saving some tables which are not necessary for understanding have been omitted in this contribution.

18

See Robert GUTTMANN (1985) for a detailed discussion of such a proposal for supra - national credit - money.

y Hansjorg Herr On Post - Keynesian Crisis Theory: The Meaning of [Financial Instability k *

P V £Since the seventies the world market is experiencing a deep transformation that can be characterized by the breakdown of the system of Bretton 'Woods, monetary and exchange - rates instability, the extreme increase in [international indebtedness etc. These developments are mutually connected r,with the decline of the USA as a hegemonic power and the extreme [mercantilism by medium and small countries. Often it is put forward that Jthe main reasons for instability can be found in the decline of profit•fates and productivity growth especially in the United States, the evolution Of new financial instruments and the growth of external unregulated capital markets (cf. Altvater, Hubner and Guttmann in this book). I would like to stress some other theoretical points which lead to some differences in explaining the instability of the world economy and in the interpretation ;of the economic history as well. F "

L" World Money and Hegemony W' Within an international production economy with integrated goods and ^capital markets a (stable) world money is needed. This is not even p r i marily the case because a common clearing standard a numeraire - is required. Rather, there is a need to hold world liquidity and financial Assets in an adequate form. In other words, there must be a medium for the payment of international trade flows, a medium in which world l i quidity can be held and international debt agreements be concluded. In a taoney economy, international individual and institutional actors - central J^anks etc. thus have a desire to hold their monetary hoardings as well p other assets in a globally recognized form. The national currency which |crves as an international standard of credit contracts and international de, as an international store of wealth etc. becomes world money. It is

the result of the portfolio decisions of internationally acting property owners and institutions.1 International wealth owners have not only to decide whether to hold their portfolio in real capital or financial assets, they have also to decide in which currency they want to hold their wealth. Of course, they willt hold their portfolio in the currency with the highest expected profitability. This is especially important for financial assets as money is easily transferable from one currency to another. Contrary to the view maintained by orthodox theory, international capital movements are not exclusively determined by interest and profit rate differentials and short - term exchange rate expectations. The Keynesian theory assumes that the "state of confidence" is a central determinant of capital flows which may over-> compensate impulses such as interest rates. Each currency has a certaiaj property protection quality which depends on the expected long-termprice stability of the currency, its long-term likelihood to depreciate or, appreciate, its share of the world capital market, the expected political; stability of the country and so on. Formally, the property protection quality of a currency - the "state of confidence" in a currency - may be| expressed in terms of a non - pecuniary rate of return or a liquidity^ premium which, combined with the pecuniary rate of return, determines^ the total value of an investment in a given currency. The idea of a "state of confidence" and "liquidity premium" was established by Keynes (1936)* to transform the uncertainty of the future into a calculus that explains the5 portfolio decisions of wealth owners. In Keynesian thinking the "state ofconfidence" cannot be seen as a mechanical outcome of certain economic^ indicators such as current account deficits, growth rates etc. It is a cat- ' egory that must be filled by historical, political and sociological facts and it shows that economics is on the edge of science and on the edge of history (cf. Hicks 1979, p. 38). Hence it is not the equality of pecuniary

i'**: 1

Marx, who in his time stressed more than anyone else the character of money as"lB' expression of abstract social property, has a suprisingly clear conception of woHd money. "World money functions as a general means of payment, a general means' 'of buying, and the absolute social material of wealth in general (universal wealth). Thi^ function as a means of payment for equalizing international balances is predominatf*' Thus the motto of the mercantilist system trade balance" (Marx 1890, p. 159 fy Marx 1894, p. 330 ff.). Marx failed to recognize that gold does not generally havrtft function as world money. Rather, its appearance indicates the erosion of a nartohll world money. At the same time, however, he recognized that the money function* cannot be suppressed by a national currency, but rather that gold as "universal weaJthT will always emerge as the ultimate security for property owners.

rates that sets the norm for market equilibrium between nations. Rather, an equilibrium requires unequal national pecuniary rates.2 The property protection qualities of the different moneys create a hierarchy of the different world currencies with large and stable currencies at the top and small and instable currencies at the bottom. Large currencies have a high liquidity premium because they are especially useful for international transactions and have a large and deep capital market. Certainly there are economies of scale with the growth of a currency. Large currencies must not be the most stable ones, and they might not be the best ones as an international store of wealth. Medium currencies like the German Mark - or even small currencies like the Swiss Franc - are able to challenge a large currency like the Dollar in certain functions. Of course, a large and stable money is at the very top of such hierarchy, which means that world money must always be a large and stable currency. In general, world money is the national money of the hegemonic nation. In Keynesian theory a (relatively) stable price level is an important precondition for functioning money economies since only a medium with a stable value can fulfil property protection functions (cf. Keynes 1936, p. 212, Kregel 1980, Davidson 1980). Fluctuations in the value of money are damaging to various money functions and lead to cumulative processes (cf. Riese 1986). Thus inflation has a destructive effect on the liquidity premium for money and ultimately results in a massive exit from financial assets and the erosion of the monetary system. Deflation increases the benefits of holding money and leads to a "flight into money". In addition, movements in the price level alter real debts and in this way induce .cumulative processes e.g. when during a deflation a growing real debt results in debt crisis and the insolvency of debtors (cf. Fisher 1933, Minsky 1975). World money as well will be unfavorably affected if its value is constantly fluctuating. The erosion in the value of a world money vis-a-vis other currencies will, like inflation, sooner or later lead to the erosion of the world money. Depreciation does not necessarily result in an immediate massive flight out of the currency - it is offset by the fear of ^realizing depreciation losses. In the long run, however, it will undermine the property protection function of a currency. Appreciation, on the other jjuuid, will stabilize the property protection function of world money. Since [Jfc For example, the equilibrium between two countries in respect to credit contract can be put forward in the following way. If i a is the interest rate and l a the (marginal) liquidity premium of credit contracts in one country and i b and l b in another country the portfolio equilibrium between the two countries is i a + l a i b + lb* The f t country with the higher liquidity premium can in equilibrium afford a lower interest I h rate (cf. Riese 1986,p. 234).

in addition to non - pecuniary rates of return additional pecuniary yields in the form of appreciation gains can be realized, there will be a movement into world money. An appreciation in world money will increase the real international indebtedness of debtor countries and will, like deflation, create the danger of international debt crises. Within a regime of integrated international capital markets fluctuating exchange rates are dysfunctional and have a destabilizing effect on the world economy. If exchange rates are fluctuating, an international portfolio holder must be constantly on guard not to have assets invested in a depreciating currency. Within unregulated international capital markets flexible exchange rates thus fundamentally increase the insecurity of international investments. "It is evident that a monetary theory that places the disposition over assets at the center of economic analysis will derive the necessity of stable exchange rates thus offering a counterproposal to neoclassical monetary theory which, based on real flow, regards the fluctuation of exchange rates, as more generally the fluctuation of prices, as a result of altered allocative conditions." (Riese 1986, p. 283) Particularly relevant in this context is the stability in the value of the hegemonic currency. If fluctuations in the exchange rate of world money are strong and recurring, the international monetary system will necesssarily be destabilized through the uncertainty of exchange rate developments and extensive liquidity shifts from one currency into another. The stability in the value of a hegemonic currency is thus a desideratum of an international money economy fully analogous to the desideratum of a stable price level within nations. The stability in the value of world money does not primarily require a framework of institutionally fixed exchange rates. The most important factor is stable market conditions in the world economy. Legally fixed exchange rates may at best reflect such stable market conditions and constitute an additional stabilizing element. The desideratum of a stable internal and external value of world money leads to a further basic requirement. World money as any money accepted by wealth holders - must be in short supply, i.e. the monetary policy of a world money producing nation must be restrictive u its currency is in danger to depreciate. If a world money producing nation violates this requirement, it will destabilize its hegemony at least in the area of international financial relations. World money has a "real" and a "monetary" basis. The "real" basis means that the producer of world money must be an important economic, political and military nation a wor 1 power. It is hard to find a general theory of the rise and fall of won power. At least Keynesian economic theory must take the "real" basis of a world money producer as exogenous. But the "real" basis of hegemony 1 not enough to become the producer of world money. The hegemony nation has to keep its money short in supply to establish its money

world money. Of course, if there is an extreme economic, political etc. dominance and even not a limited competition between different national currencies, the national currency of the hegemonic country becomes the "natural" world money. But even in this case an inflationary policy of the hegemonic nation destabilizes the world economy. But this case is not very interesting as in history there are always second or third countries which challenge the hegemonic force at least partially. In this context it can be assumed that an undue expansion in world money supply will lead more rapidly to the erosion of a world money than a "real" economic decline of hegemony. Thus an erosion of world money is possible even under a stable "real" hegemony. By contrast, a world money producing nation can conceal a declining "real" basis for a long time by keeping its money tight. Obviously, a world monetary system will be destabilized in a particularly fatal way if both the "real" basis of hegemony is weakened and world money is not kept in short supply. A stable hegemonic position is connected with the role of creditor in any case Britain before World War I and the United States after World War II were net-creditor nations. There are a number of theoretical arguments that can account for this fact. A creditor nation is in a much better situation than a debtor nation to attract capital inflow and restrict capital outflow, thus stabilizing the exchange rate. It is obviously easier to provide fewer loans than it is to secure additional loans (cf. Keynes 1913, p. 15 f.f.). Moreover, payments of interest and principal stabilize the exchange rate of a creditor nation. Thus a creditor nation may very well have both a negative trade balance and a positive current account, and still further expand its creditor position. This constellation was typical for Britain under the gold standard (cf. Ford 1962, Bloomfield 1959). There is, however, a more fundamental argument for the necessary concurrence of hegemonic position, world money, and creditor role. It is the logic of debt agreements that they are always honored in the "credrtors money". If the debtor could pay his debts with money he has Produced himself, the debt agreement would be worthless to the creditor since he would be dependent on the goodwill of the debtor. In short, ebt agreements will imply a real obligation only if the debtor cannot rbitrarily dispose of his debt by increasing and depreciating the "debtor's °ney". Applied to the world economy, this means that international jedit agreements can only be concluded in the creditor's currency. If nat a g r e e m e n t s c o u l d b e honored in the debtor's currency, the debtor 0 n would be in a position to dispose of its debt by promoting inflation an(J bee 3 m a s s * v e devaluation. If the world money producing nation itself mes a debtor nation, international credit agreements will be subject to a ..° ral h . a z a r d " s i n c e it will be easy and tempting for the hegemonic n atio° n to dispose of its debts by printing money.

The world money producing country can be considered as functioning as a bank (cf. Minsky 1979). It realizes high short term capital imports and high long term capital exports. This means that a reserve currencyv country earns the income of a banker. But much more important is that' the hegemonic banker can act as a world economic trend-setter via international credit expansion - analogous to a national credit - accumu - * lation mechanism (cf. Herr 1986). A hegemonic nation in any case is able' to impose globally a common macroeconomic policy and prevent theJ erection of (economic) blockades between nations. If the hegemonic nation1 keeps its money stable, generally second and third nations will passively' follow its economic leadership. To resist against a stable hegemonic country would only be damaging to smaller nations themselves. For s m a l ler countries it might even be advantageous to follow the economic course' of the hegemonic power and profit as free rider. Of course, not all' countries must benefit within a hegemonic system, but there are "peer groups" likely which gain from the regime. The situation just described can clearly be seen under the gold standard during the last century. An expansion of international credits in pound stimulated the world economy,' which in Britain manifested itself in an increase in both exports and imports (cf. Ford 1962, p. 73 ff.). The United States assumed this role^ after World War II. In the fifties and sixties, the USA clearly were the^j locomotive for the world economy since nationally as well as internation-^ ally they were able to keep the world economy on an expansionary coursed through credit expansion. y^K Unfortunately the role of an international banker makes it necessary tc^ remain like any banker liquid. That means that a world money producing^ nation must be able to influence easily international capital flows manage its cash flow. A very good measure for the stability of a hegem«£| onic nation is its ability to create a positive cash flow without high inter est rates. A stable hegemonic leader can influence its cash flow by small^ interest rate variations on the basis of a high liquidity premium of its' money, a weak hegemonic power which has lost the confidence in its" money is forced to use high interest rates which are damaging to itself and the world economy to control its cash flow. Again this argument points out that a creditor position is a vital element of a stable monetary hegemony. It can be argued that a positive current account is a vital sign of the creditworthiness of an international banker and property owner are only fond of holding "deposits" in a country that has a current account surplus (cf. Padoan 1986).

//.

The Instability of a Multi-currency Standard

A crisis of a world money will cause considerable disruptions in the world economy. This is the case because capital flows become instable, cumulative processes are triggered off and generally the uncertainty of economic developments intensify. The erosion of a world money can be the result of a substantial reduction of the "real" power of a hegemonic force and the appearance of strong competitors in the economic, political and military field. The erosion might as well be the result of an inflationary policy of the world money producing nation which destroys the property protection quality of the world money. In the last case the hegemonic nation is no longer willing to provide the international public good of a stable world monetary system (cf. Kindleberger 1986). But to give a sketch of the working of a multi - currency system a substantial "real" erosion of hegemony is assumed. If there is no longer a dominant world money or no country that from its "real" power is determined to become the producer of world money, the world economy will slide towards a multi - currency standard since now the national currencies of a (few) number of strong economies can assume world money functions. If there are several potential world moneys, then in the eyes of portfolio holders several currencies will have potentially high non - pecuniary rates of return. Up to this point the •situation is not serious yet since, even under the stable hegemony of one (currency, subordinate currencies have (lower) non - pecuniary yields. The Specific character of a multi - currency standard consists in the fact that [even a minor impulse may quickly and erratically reverse the order of non-pecuniary rates and change the hierarchy of the different national [currencies. As a result, estimates of a currency's adequacy as world money [will become unstable, leading to equally unstable and cumulative capital [movements, a diversification in the holding of world liquidity, and radical [exchange rate fluctuations. There is no longer a safe place for interna[tional liquidity. Portfolio holders constantly have to guard against losing 'their assets through the sudden erosion of a world money. As a whole, uncertainty about global economic and monetary developments will increase. If there is a clearly dominant world money, the massive pulling out of this currency, given the lack of alternatives, is conceivable only if the confidence in this currency has been seriously upset. Under a multicurrency standard, however, there are alternatives. Slight impulses that may be exogenous to the economy and would have remained insignificant in a hegemonic system, under a multi - currency standard will lead to destabilization. In addition, fluctuating exchange rates under a multi - currency standard open the doors to currency speculation, which in itself becomes a destabilizing factor.

A multi - currency standard is characterized by a "merciless competition n the provision of central bank notes for the credit market" (Stadermann 1986, p. 199). International portfolio holders can force central banks into^ :ompetition with each other with the aim of creating a stable money since :hey have a choice between different currencies. The means of sanctioning ^ :entral banks consists in pulling capital out of currencies that, in the eyes jf portfolio holders, have lost their property protection function and investing it in currencies that better serve their future interests. As a ° result, national autonomy will usually be severely restricted under an expansionary macroeconomic policy. If one pole expands under a multi - ~ currency standard, the global expansionary mechanism of multiplying world economic activity characteristic for a hegemonic system will be destroyed. The expansionary pole is incapable of imposing its own economic policy : on other nations. Instead, it will move into an external imbalance with import surpluses. Virtually as free riders, other currency poles can pick up: export surpluses at home and expand their creditor position. If the: expanding pole loses its property protection function because of continuous import surpluses, a high inflation rate relative to other poles, etc., ther! currency will abruptly break down as a result of capital outflow or insufficient inflow. An economy is sucked into a depreciation cycle when the import quota is relatively high, increases in the price level promptly bringabout movements in money wages - an extreme case here is the indexing" of nominal incomes - and monetary policy takes into account the employment situation, financing the rise of money wages by expanding the money supply. Ultimately, the central bank of such a nation must stop the erosion of the internal and external value of its currency, otherwise the cumulative process will move towards the erosion of the national monetary system or a pulling out of the national currency in all its forms - into"* other currencies, gold, real assets, etc. The only market solution in order7 to stop a depreciation - inflation spiral is a high interest policy and a* r1t ; reduction in domestic production and employment. The competition between a few leading currencies will lead to an^ internationally relatively high level of interest rates. Here it becomes^ evident that there is no longer a hegemonic nation with globally relatively1 low interest rates in the long run. More important, however, is that under^f a multi - currency standard currency sieges are preprogrammed. If a nationr is confronted with the danger of losing its reserve currency function and is* confronted with massive capital outflows and depreciation, the only way to* defend its own currency will be through high interest rates. A high inter est policy aimed at offsetting a currency's deteriorating liquidity premium1 or to build up confidence in its currency are the distinguishing marks of ai* multi - currency standard. This means that a restrictive economic policy* becomes the instrument to save the stability of a currency with inter--

national functions. In such a regime the anticipation of the economic policy of nations - it can be spoken from Keynesian rational expectations - becomes a vital part of the state of confidence of a currency. A system with several potential world money producers has a striking political characteristic. As real economic factors do not decide which of the nations becomes the leader, monetary factors become a vital base of dominance. In such a system, generally the nation with the most restrictive economic policy, the lowest wage - increases, highest productivity gains, most stable internal political situation etc. becomes the producer of world money and the leading nation. The role of the DM within the European Monetary System is a good example for leadership which, to a large extent, is based on the resrictive monetary and fiscal policy of Germany and not on its real power in respect to industrial, military etc. strength (cf. Herr, Voy 1989, Herr, Westphal 1989). Countries experience the regime of a multi - currency system as a high uncertainty in respect to international monetary affairs. For a country a permanent positive current account and even better a positive trade balance - is an ideal instrument to protect itself against international monetary disturbances. This means that (trade) mercantilism is an instrument to save or build up confidence in a currency. Mercantilism is not an instrument to stimulate growth and employment in spite of the fact that a positive trade balance is identical with an export of internal unemployment. It is the reflection of a generally cautious attitude towards growth and a high preference for price stability (cf. Vines 1980). A rapidly growing country will not achieve current account surpluses as generally its growth will be restricted by occurring current accounts deficits. In any case, a surplus in the current account indicates external room for manoeuvre for internal growth. During the fifties and sixties the West German surpluses combined with high internal accumulation only show the extreme undervaluation of the DM during that period and must be judged as an exception. During the first two decades after World War II Japan realized an even larger real growth than Germany and was, in respect to growth, restricted by its current account. It used all its room for m a noeuvres for internal expansion. Last but not least, a permanent surplus in the current account leads to a net creditor position improving ultimately the economic and political power of a country. In fact, generally the net creditor or net debtor position of a country must be interpreted as a sign of its international strength or weakness. In the light of these arguments it is evident that a persistent current account surplus increases the prestige of a government and its international political influence. At the same time a successful mercantile country can diminish internal political and social conflicts as there exists a common political goal or ideology (cf. Frey

If many or even only a few important countries follow a mercantilist strategy the world market turns ultimately into a world-wide zero sum' game. The likelihood of such a disastrous game is quite different in a' hegemonic and in a multi - currency system (cf. Guerrieri, Padoan 1986), It is likely that in a hegemonic system the leading nation can control the, mercantilist strategies of the different countries. As the hegemonic nationj acts as an economic trend-setter and coordinator of world macroeco-. nomic policies a harmonious development of the world economy is likely. In a multi - currency system, there is no institution to control the mer- ^ cantilist strategies of countries. It is much more likely that the uncertain^ of such a regime provides an additional stimulus to save the quality of ^ currency and to follow imperialistic ambitions by current account surpluses.' The result is a generally restrictive economic regime. But it can even lea4 to a disastrous competition of restrictive economic policies resulting in a' great depression. The more countries turn to a mercantilist strategy and' the more there exists an asymmetric adjustment process for deficit coiin-^ tries via private capital movements and a lack of international institutions, the more depressed will the world economy become (cf. Vendenbroucke; 1985, Johansen 1982, Vines 1980). Ill.

An Interpretation of the Economic Developments in Respect to Monetary Matters since World War 11

J*

In the light of these few theoretical remarks the economic development since World War II can be discussed. My general explanation of the economic and monetary problems since the seventies is the transformation of the world economy from a hegemonic system to a oligopolistic multi-* currency standard. The Dollar still is the leading currency, but it has got serious competitors, mainly the Mark and the Yen. The instability of the Dollar has "real" and "monetary" reasons. But in my opinion the certainly' reduced "real" position of the USA is not the most important or even; only argument for the erosion of the Dollar as world money. Even the reduced "real" power of the USA would be sufficient to create a stable world money and a much more stable world economy. The main reason for the instability of the world economy must be found in an undue expansion of the supply of Dollar and in a radical mercantilist orientation of second and third western powers especially West Germany and Japan. This proposition can be elucidated by discussing a few historical key-events and economic debates. ^ -f

a) The development of the oversupply of the Dollar until the late seventies After World War II, an extensive debate was initiated on the role of the United States as world money producer (cf., for example, Triffin 1960, Aliber 1974). The debate may be summarized under the heading of the Triffin dilemma" which discussed the role of the Dollar as world reserve currency. It was emphasized that gold which is inelastic due to the nature of its production and foreign exchange reserves - which depend on the hegemonic nation's current account - do not have the elasticity required for adjusting to global liquidity needs. This entailed the danger of periodic shortages and overabundance in world liquidity. A further danger that was noted was a crisis of confidence in the Dollar, which under the system of Bretton Woods was the only currency convertible by central banks into gold. If the Dollar was to satisfy a rapidly growing demand for world liquidity as a result of increased world trade, then the volume of U.S. currency in circulation would soon go far beyond U.S. gold reserves, thus making the convertibility of the Dollar into gold illusory.3 The debate of that time has limitations as the role of gold is overestimated. There is no loss of confidence because U.S. gold reserves are too low analogously there is no loss of confidence in banks if their cash reserves do not match the volume of deposits. Before World War I Britain had very low gold reserves, indeed lower than some developing countries at that time and there existed no confidence problem (cf. Ford 1962). However, a loss of confidence in world money will come about if there are doubts regarding its future stability. Gold will only come to play a role if confidence has been shaken (for other reasons) and gold is becoming a better store of wealth than a national currency. By emphasizing the external economic constraints on the world reserve currency preserving its own hegemony and being responsible for the international monetary system the debate on the 'Triffin dilemma" implicitly brought out an important aspect of a hegemonic monetary system. The problem, however, is not a lack of elasticity in world liquidity - and even less an undue shortage. Rather, it is the necessity for a world money producing nation to preserve the stability of its own currency and for this purpose it has to impose restrictive domestic policies in certain circumstances. Thus in the 1960s the United States should have imposed restrictive policies to stabilize the Dollar in response to an oversupply of world liquidity. This,

3

I

r

The so-called Triffin Plan saw the solution of the problem in the creation of an international artificial money. In 1969 the debate resulted in the creation of the Special Drawing Rights, which however to this day have not played any significant role.

however, would have been at odds with their domestic economic as well as with (short-term) global economic and political objectives. The early seventies were characterized by a set of problems that make^ it possible to speak of a turning point in world economic development^ The United States "abused" their privileges as world money producer an(T in this way brought about a weakening of its hegemony. From the mid- ? * sixties, the USA extensively pursued a Keynesian policy of expansionary demand management. The macroeconomic policy initiated under* President Kennedy and continued under President Johnson - may be' summarized under the heading of "full - employment budget". Internally^ the welfare state was enormously expanded while externally the United States became entangled in the Vietnam War. This resulted in an expan-*J sionary fiscal policy with a simultaneously accommodating monetary policy,* which in 1969 for the first time since the fifties brought about a rise ofj the inflation rate to more than 5 percent. On the whole, there was air excessive quantitative expansion of the Dollar supply globally. As a result* of the deterioration of the trade balance the U.S. current account waSj sliding into a deficit in 1971/72 and the inflationary Dollar came under, permanent depreciation pressure. This deterioration of the current account was not primarily due to a general lack of productivity growth within the' United States, it was simply the result of macroeconomic circumstances.4 ^ Since the late sixties until the late seventies the U.S. domestic economic policy did not reflect the international role of the Dollar. In? spite of the external weakness of the currency an extreme expansiveeconomic policy was practiced that increased the inflation rate and created* a permanent problem to balance the current account. In fact, the United^ States withdrew from its responsibility for the system of Bretton Woods, accepting the depreciation of the Dollar in order to reestablish a positive trade balance. The unilateral opting out of its obligation to maintain the: gold convertibility of the Dollar in 1971 was actually celebrated as a great4 success by the Nixon administration (cf. Calleo 1980, p. 787 f.). Thej; Dollar had lost its confidence and frequently it came to Dollar crises. At the same time other countries especially West Germany were notj prepared to accept the inflationary effect of the U.S. domestic policy. The; 4

V ti The expansionary fiscal policies of the United States initiated in the sixties and still existing today are partly related to the country's role as a hegemonic power. The United States is forced to spend extensive public resources in order to preserve its' hegemony ranging from enormous military expenditures and the funding of international institutions to development aid. It has been suggested that for political reasons the resources necessary for the preservation of hegemony cannot be adequately covered by taxes. The United States is therefore constantly forced to adopt expansionary fiscal policies (cf. Calleo, Cleveland, Silk 1988).

monetary order of the post-war period could thus no longer be preserved. In 1973 the system of Bretton Woods finally collapsed. After the collapse of the system of Bretton Woods the USA followed a moderate depreciation policy with the aim to combine a balanced current account with an expansive (mainly monetary) economic policy. During the last years of the system of Bretton Woods this policy was more or less successful as the deficit of the current account in 1971/72 turned back into surpluses. In 1977, the U.S. current account became negative again. This time the deficit was much bigger than during 1971/72 and the USA pressed other western nations for expansive economic policy and a controlled depreciation of the Dollar (see below). Thus the policy of the world money producing nation was solely related towards internal needs. President Carter like his predecessors - was not prepared to create an internal crisis to stabilize the Dollar. A depreciation policy can only work, if higher import prices do not spill over to internal nominal income - mainly money wages and if the depreciation does not trigger off destabilizing capital exports. Especially the last point is very difficult to achieve for a reserve currency country. Without tough capital controls for the producer of world money it is nearly impossible as already a small portfolio shift against the depreciating country will create extreme exchange rate turbulences. Volcker, the later president of the U.S. central bank, puts this dilemma like this: "A nation, most of all a great power, does not want to be hampered in its domestic policies, or in its international security or political objectives, by external economic constraints, and specifically by the need to guard against a breakdown of the monetary system. In other words, we wanted an open system, but like others had a taste for autonomy too. (...) In an open system, the external c o n straint is there. If ignored for long, a crisis will develop." (Volcker 1978, p. 7) The crisis of the Dollar came in the late seventies. In sum: The instability of the world monetary system until the late seventies was mainly the result of the oversupply of the Dollar in relation to other western currencies. This Dollar superfluity was the outcome of the completely internal economic orientation of the U.S. - monetary and fiscal policy - the result of the (understandable) refusal to create an internal crisis to stabilize the Dollar as world money. "Real" factors as the slowdown of productivity growth, the fall of the U.S. profit rate etc. are not really important in these developments. Of course, the world in "real" terms had become more pluralistic and the United States had lost complete dominance Kindleberger (1981) sees the loss of dominance as early as 1960. This implied that the USA could not dictate the economic policy of other leading western nations which judged the U.S. policy harmful for themselves. Likewise it is true that during the sixties new currencies developed which had built up property protection qualities and

became limited competitors for the Dollar. In spite of these facts a shortening of the supply of the Dollar would easily have preserved the' acceptance of the Dollar as world money and the economic leadership of3 the USA. The erosion of the Dollar, the refusal of the USA to stabilize it, the pulling out of the weak Dollar by property owners and the unwil-* lingness to accept these developments by medium and smaller western^ states made the flexibilization and deregulation of international monetaiyj matters to the only realistic outcome. Thus the breakdown of the system** of Bretton Woods was the result of a lack of international responsibility;! and a lack of international cooperation. ^f? Frequently, financial innovations and deregulations are made responsible for the instability of the world economy since the seventies. As1 a general proposition this is not true. Euro-markets which can stand fort financial innovations are a good example. They are external segments o r the different national internal capital markets. Euro-banks are not subject^ to cost - escalating domestic regulations and fees (such as minimum*' reserve obligations), so they are able to offer higher interest rates on" deposits while maintaining lower interest rates on loans than it is the case? with domestic financial institutions. In this way they can expand thenf business volume and can grow faster than the internal segments of the* capital markets. In respect to monetary policy the euro-banks create no^ substantial problems for central banks. The restrictive power of central* banks is in no way broken by external markets as an expansion of euro-v banks does not eliminate the liquidity problem of these banks. Of course*; the credit expansion in unregulated markets needs less central bank moaey* than an internal credit expansion. But even in completely unregulated^; capital markets there is always a maximum of credits that can be given tq^ the banking system. Financial innovations can increase the maximum credjl| volume but they cannot eliminate it (cf. Tobin, Brainard 1963). Moreover, a central bank can move directly, through interest - m i l policy, to affect the interest on the euro-segment of its currency. Sincr interest rates for the domestic money market within banks and interest rates for the euro-market are closely linked through the arbitratfojjf process of banks (an arbitration tunnel), the central bank can control thflf euro - interest rates directly by influencing the interest rates on internal* money market. The theoretical argument can also put forward generally^ Financial innovations can make the credit multiplier larger and more* instable but credit multipliers have never been stable and the power of central banks was always mainly reduced to set the maximum of the credit multiplier. Financial innovations do not reduce the restrictive power'of central banks and they do not increase their weakness in stimulating the* economy. The instability is found in the breakdown of the system''dR Bretton Woods, in the instability of capital movements and the wild fluc^ i'M

tuations of exchange rates. These processes are the result of the interaction between different currency areas and not the result of interactions within them. The division of currency areas in internal and external segments is rather secondary (cf. Herr 1987). Nevertheless, certain institutional changes can lead to instability. The deregulation in the form of the breakdown of the system of Bretton Woods led to two institutional changes which increased instability. First, flexible exchange rates became, as pointed out, a factor of instability on its own, second the breakdown of the system of Bretton Woods led to a general decrease of capital controls and in this way to more integrated international capital markets. b) The defence of the Dollar as world money 1979 was a crucial year in the world economic development. The strategy of the United States fell apart in nearly every respect. The Dollar began to collapse starting in 1977. Mainly as a result of the depreciation, the U.S. inflation rate again started to rise from under 6 per cent 1976 to over 13 per cent 1980. There was the danger of a cumulative depreciation inflation - spiral. Even raw material prices were no longer based on the Dollar. The Mark (together with other European currencies and a r e newed attempt to establish the European Monetary System) as well as the Yen had become potential alternative investment currencies. It was evident that without a change in policy, the erosion of U.S. monetary hegemony that had started in the late sixties would induce an increased restructuring in world liquidity and financial assets towards a multi - currency standard. At the political level as well, the strategy of the United States collapsed. This was particularly obvious in the Middle East: Iran was lost as an American base with the Islamic revolution, the second oil price hike in 1979 could not be stopped, etc. In addition, bilateral disarmament negotiations entered a period of crisis since Europe articulated its own interests vis-a-vis the United States. In 1979, for the first time since World War II, the United States massively felt the dictate of the balance of payment. Already under President Carter, the United States began the Struggle to reestablish monetary hegemony and to stabilize the Dollar as world money through a high - interest policy. i The main occurence in this period was the clash between the USA and West Germany. After 1975, Germany turned to an extreme restrictive fiscal policy and created a huge current account surplus. In the so-called locomotive discussion President Carter pressed Germany and Japan for expansive policies. Japan already implemented expansive measures but Germany continued its restrictive economic strategy which made the Mark for international wealth owners even more attractive as an alternative to the Dollar. Finally, after intensive political pressure, in 1978 the German

Schmidt - Administration followed a moderate expansive fiscal policy but the Bundesbank rejected any cooperation with the USA. In 1978, the* U.S. - monetary and fiscal policy became more restrictive. But any rise in* the U.S. - interest rate was followed by an increase in German rates. Thatff means that the policy of the Bundesbank prevented an early recovery oP the Dollar. Even Paul Volcker who, in 1979, became president of the$ FED tried to cooperate with the Bundesbank, but failed. Why did the| Bundesbank prevent an early recovery of the Dollar? At that time the! Bundesbank was not fond of becoming a world reserve currency becausM (realistically) the Mark is too small to fulfil the role of a world money* The "ideal" role of the Mark was seen as a regional hegemonic power l i n Europe in the background of a stable Dollar as world money. Obviously*! the Bundesbank tried to push the Dollar to a complete recovery as world! money and prevent an only partial regeneration under President Carter! (cf. Spahn 1988). It is well known that at the end of 1979 the USA gave up any co-Pj operation and fought alone for the recovery of the Dollar with disastrous effects. In the early eighties as a result of the extreme restrictive mone-3j tary policy of the USA the world economy went into a deep recession* resulting in a global rise in unemployment and a debt crisis in the Thirds World. However, it also had the effect of rapidly reducing inflation ratesfi in the industrial nations. Obviously the huge euro-market in Dollar could^ not substantially reduce the restrictive power of the Federal Reserve^ System. On the basis of the U.S. change in policy, the Dollar began to(j regain its stability. But it is important that its general appreciation started^ not until late 1980 the success of Reagan in the American election^ Under President Reagan the restrictive policy initiated by President Carteft was continued, giving rise to the danger of a cumulative downward spiral! in the world economy. The worsening debt crisis in the Third World a^ well as within the United States was the immediate reason for the Federal! Reserve Board's shift - towards a less restrictive monetary policy in the fall| of 1982. The combination of a strong nominal expansion in the moneys supply, low nominal interest rates, large budget deficits under "Reagan*® omics" as well as a general improvement in the investment climate asva^ result of Reagan's new presidency produced an economic upswing in the^ United States starting in 1983. The rapid success in the struggle againsti inflation as well as the largely non - inflationary boom in the Unitedj States were strongly favored by the appreciation of the Dollar (cf. Sachsj 1985). The, by international comparison, relatively favorable employment^ record and the dynamic performance of the U.S. economy were in largcfe part due to an enormously expansionary fiscal policy (cf. Dornbusch 1986)j| In 1982 and the following years the USA acted as a hegemoni